Question 1

By ________ its deficit,the government makes an anti-inflationary policy ________ credible.

Accepted Answer

A)  increasing; more 
B)  reducing; more 
C)  reducing; less 
D)  not changing; more 
A)  increasing; more 
B)  reducing; more 
C)  reducing; less 
D)  not changing; more B

Question 2

The time inconsistency problem means that policy makers are always tempted to pursue _________ policy in the short run.

Accepted Answer

A)  expansionary 
B)  contractionary 
C)  inconsistent 
D)  non-discretionary 
A)  expansionary 
B)  contractionary 
C)  inconsistent 
D)  non-discretionary A

Question 3

One of the drawbacks of rules based monetary policy is ________.

Accepted Answer

A)  the true model of the economy is unknown, so a single rule may not be appropriate 
B)  they are too complicated for the general public to understand 
C)  these types of programs are difficult to implement in practice 
D)  none of the above 
A)  the true model of the economy is unknown, so a single rule may not be appropriate 
B)  they are too complicated for the general public to understand 
C)  these types of programs are difficult to implement in practice 
D)  none of the above A

Question 4

A credible nominal anchor ________.

Accepted Answer

A)  can help overcome the time-inconsistency problem by providing an expected constraint on discretionary policy 
B)  can help to anchor inflation expectations, which leads to smaller fluctuations in inflation 
C)  is required for a policy rule 
D)  all of the above 
E)  both A and B 
A)  can help overcome the time-inconsistency problem by providing an expected constraint on discretionary policy 
B)  can help to anchor inflation expectations, which leads to smaller fluctuations in inflation 
C)  is required for a policy rule 
D)  all of the above 
E)  both A and B

Question 5

Arguments for discretionary policies include ________.

Accepted Answer

A)  policy rules can be too rigid because they cannot foresee every contingency 
B)  policy rules do not easily incorporate the use of judgment 
C)  discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect 
D)  discretion enables policy makers to change policy settings when an economy undergoes structural changes 
E)  all of the above 
A)  policy rules can be too rigid because they cannot foresee every contingency 
B)  policy rules do not easily incorporate the use of judgment 
C)  discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect 
D)  discretion enables policy makers to change policy settings when an economy undergoes structural changes 
E)  all of the above

Question 6

One of the drawbacks of rules based monetary policy is ________.

Accepted Answer

A)  it can be too rigid a system and unable to address unforeseen contingencies 
B)  it minimizes the role of central banks and bankers 
C)  these types of programs are difficult to implement in practice 
D)  none of the above 
A)  it can be too rigid a system and unable to address unforeseen contingencies 
B)  it minimizes the role of central banks and bankers 
C)  these types of programs are difficult to implement in practice 
D)  none of the above

Question 7

The difference in outcomes occurring with a credible nominal anchor and without one,given a negative aggregate demand shock is that ________.

Accepted Answer

A)  with the credible policy there is no shift in the aggregate supply curve 
B)  there is no difference but credibility provides national security 
C)  without credible policy, inflation will continue to spiral upwards 
D)  with credible policy, the aggregate supply curve shifts back quickly 
A)  with the credible policy there is no shift in the aggregate supply curve 
B)  there is no difference but credibility provides national security 
C)  without credible policy, inflation will continue to spiral upwards 
D)  with credible policy, the aggregate supply curve shifts back quickly

Question 8

After the first two oil price shocks ________.

Accepted Answer

A)  the Canadian inflation rate increased sharply 
B)  the Bank of Canada reversed its monetary policy stance 
C)  there was no discernible impact on aggregate output 
D)  the Bank of Canada implemented a nominal credible anchor policy 
A)  the Canadian inflation rate increased sharply 
B)  the Bank of Canada reversed its monetary policy stance 
C)  there was no discernible impact on aggregate output 
D)  the Bank of Canada implemented a nominal credible anchor policy

Question 9

Describe how the Bolivian government managed its hyperinflation by introducing credibility.

Accepted Answer

In the first half of 1985,the Bolivian e

Question 10

An example of a positive aggregate demand shock is ________.

Accepted Answer

A)  carbon cap-and-trade program 
B)  productivity improving technological innovation 
C)  an increase in the price of oil 
D)  the shale gas revolution 
A)  carbon cap-and-trade program 
B)  productivity improving technological innovation 
C)  an increase in the price of oil 
D)  the shale gas revolution

Question 11

In the first half of 1985,Bolivia's inflation rate was approximately ________.

Accepted Answer

A)  200,000 percent 
B)  20,000 percent 
C)  2,000 percent 
D)  200 percent 
A)  200,000 percent 
B)  20,000 percent 
C)  2,000 percent 
D)  200 percent

Question 12

If aggregate output is below the natural rate level,advocates of discretionary policy would recommend that the government ________.

Accepted Answer

A)  do nothing 
B)  try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right 
C)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right 
D)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left 
A)  do nothing 
B)  try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right 
C)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right 
D)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left

Question 13

Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is credible,then ________.

Accepted Answer

A)  the public's expected inflation will remain unchanged 
B)  the short-run aggregate supply curve will not shift 
C)  over time inflation will fall back down to the inflation target 
D)  all of the above 
E)  both A and B 
A)  the public's expected inflation will remain unchanged 
B)  the short-run aggregate supply curve will not shift 
C)  over time inflation will fall back down to the inflation target 
D)  all of the above 
E)  both A and B

Question 14

If aggregate output is below the natural rate level,advocates of nondiscretionary policy would recommend that the government ________.

Accepted Answer

A)  do nothing 
B)  try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right 
C)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right 
D)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left 
A)  do nothing 
B)  try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right 
C)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right 
D)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left

Question 15

By ________ its deficit,the government's credibility of anti-inflationary policy ________.

Accepted Answer

A)  not changing; remains the same 
B)  reducing; increases 
C)  reducing; decreases 
D)  not changing; increases 
A)  not changing; remains the same 
B)  reducing; increases 
C)  reducing; decreases 
D)  not changing; increases

Question 16

Arguments for discretionary policies include

Accepted Answer

A)  policy rules can be too rigid because they cannot foresee every contingency 
B)  the time-inconsistency problem can lead to poor economic outcomes 
C)  discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run 
D)  all of the above 
A)  policy rules can be too rigid because they cannot foresee every contingency 
B)  the time-inconsistency problem can lead to poor economic outcomes 
C)  discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run 
D)  all of the above

Question 17

Monetarists ________.

Accepted Answer

A)  see wages as being sufficiently sticky so that the wage and price adjustment process is reasonably slow 
B)  are skeptical of the need for active government policies to restore the economy to full employment 
C)  argue for active government policy to restore the economy to full employment when unemployment is high 
D)  Only A and B of the above 
A)  see wages as being sufficiently sticky so that the wage and price adjustment process is reasonably slow 
B)  are skeptical of the need for active government policies to restore the economy to full employment 
C)  argue for active government policy to restore the economy to full employment when unemployment is high 
D)  Only A and B of the above

Question 18

The Lucas critique highlighted the need for ________.

Accepted Answer

A)  better econometric models 
B)  new policy models that included rational expectations 
C)  fiscal policy 
D)  adaptive expectations 
A)  better econometric models 
B)  new policy models that included rational expectations 
C)  fiscal policy 
D)  adaptive expectations

Question 19

The U.S.government can play an important role in establishing the credibility of anti-inflation policy by ________.

Accepted Answer

A)  demonstrating fiscal responsibility 
B)  monitoring the Fed 
C)  conducting fiscal policy 
D)  all of the above 
A)  demonstrating fiscal responsibility 
B)  monitoring the Fed 
C)  conducting fiscal policy 
D)  all of the above

Question 20

The rational expectations hypothesis implies that when macroeconomic policy changes,________.

Accepted Answer

A)  the economy will become highly unstable 
B)  the way expectations are formed will change 
C)  people will be slow to catch on to the change 
D)  people will make systematic mistakes 
A)  the economy will become highly unstable 
B)  the way expectations are formed will change 
C)  people will be slow to catch on to the change 
D)  people will make systematic mistakes

Exam 26: The Role of Expectations in Monetary Policy

By ________ its deficit,the government makes an anti-inflationary policy ________ credible.

The time inconsistency problem means that policy makers are always tempted to pursue _________ policy in the short run.

One of the drawbacks of rules based monetary policy is ________.

A credible nominal anchor ________.

Arguments for discretionary policies include ________.

One of the drawbacks of rules based monetary policy is ________.

The difference in outcomes occurring with a credible nominal anchor and without one,given a negative aggregate demand shock is that ________.

After the first two oil price shocks ________.

Describe how the Bolivian government managed its hyperinflation by introducing credibility.

An example of a positive aggregate demand shock is ________.

In the first half of 1985,Bolivia's inflation rate was approximately ________.

If aggregate output is below the natural rate level,advocates of discretionary policy would recommend that the government ________.

Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is credible,then ________.

If aggregate output is below the natural rate level,advocates of nondiscretionary policy would recommend that the government ________.

By ________ its deficit,the government's credibility of anti-inflationary policy ________.

Arguments for discretionary policies include

Monetarists ________.

The Lucas critique highlighted the need for ________.

The U.S.government can play an important role in establishing the credibility of anti-inflation policy by ________.

The rational expectations hypothesis implies that when macroeconomic policy changes,________.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

By its deficit,the government makes an anti-inflationary policy credible.

By its deficit,the government's credibility of anti-inflationary policy .