Question 1

The oil shock in 2007 ________.

Accepted Answer

A) had little impact on the inflation rate in Canada 
B) led to a sharp increase in the inflation rate 
C) did not impact Canadian output 
D) was beneficial to the Canadian economy because Canada is a net exporter of oil 
A) had little impact on the inflation rate in Canada 
B) led to a sharp increase in the inflation rate 
C) did not impact Canadian output 
D) was beneficial to the Canadian economy because Canada is a net exporter of oil A

Question 2

The difference in outcomes occurring with a credible nominal anchor and without one, given a positive 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 A

Question 3

How did Canada win the battle against inflation?

Accepted Answer

The Bank of Canada battled against double digit inflation and stayed the course over two major recessions in the 1980s. By the end of 1983, inflation had fallen to less than 5 percent.In 1988, the Bank of Canada and federal government announced jointly a series of inflation targets.

Question 4

The oil crisis in the 1970s led to an unemployment rate of over ________ percent.

Accepted Answer

A) 13 
B) 12 
C) 10 
D) 14 
A) 13 
B) 12 
C) 10 
D) 14

Question 5

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 6

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 7

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) A and B only 
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) A and B only

Question 8

Which of the following formed part of the Bolivian government plan to reduce inflation?

Accepted Answer

A) Daily balancing of the budget 
B) Contractionary monetary policy 
C) Creation of a new currency 
D) Nationalization of 10 percent of private industrial activity 
A) Daily balancing of the budget 
B) Contractionary monetary policy 
C) Creation of a new currency 
D) Nationalization of 10 percent of private industrial activity

Question 9

If a negative aggregate demand shock occurs and monetary policy is not credible then ________.

Accepted Answer

A) economic activity will decrease 
B) the equilibrium interest rate will rise 
C) there will be a corresponding autonomous increase in inflation 
D) none of the above 
A) economic activity will decrease 
B) the equilibrium interest rate will rise 
C) there will be a corresponding autonomous increase in inflation 
D) none of the above

Question 10

The political business cycle can lead to ________.

Accepted Answer

A) expansionary monetary policy 
B) expansionary fiscal policy 
C) corruption 
D) A and B only 
A) expansionary monetary policy 
B) expansionary fiscal policy 
C) corruption 
D) A and B only

Question 11

Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible, then ________.

Accepted Answer

A) the public's expected inflation will remain unchanged 
B) the short-run aggregate supply curve will rise 
C) over time inflation will fall back down to the inflation target 
D) all of the above 
E) A and B only 
A) the public's expected inflation will remain unchanged 
B) the short-run aggregate supply curve will rise 
C) over time inflation will fall back down to the inflation target 
D) all of the above 
E) A and B only

Question 12

Today, most economists ________.

Accepted Answer

A) accept that expectations formation will change when the behavior of forecasted variables changes 
B) believe that the Lucas critique has been discredited 
C) accept the notion that there is no role for discretionary stabilization policy 
D) believe that having policy credibility is not an important factor to a successful anti-inflation policy 
A) accept that expectations formation will change when the behavior of forecasted variables changes 
B) believe that the Lucas critique has been discredited 
C) accept the notion that there is no role for discretionary stabilization policy 
D) believe that having policy credibility is not an important factor to a successful anti-inflation policy

Question 13

Approaches to establishing central bank credibility include ________.

Accepted Answer

A) inflation targeting 
B) exchange rate targeting 
C) central bank independence 
D) appointment of a more conservative central banker 
E) all of the above 
A) inflation targeting 
B) exchange rate targeting 
C) central bank independence 
D) appointment of a more conservative central banker 
E) all of the above

Question 14

Arguments for adopting a policy rule include ________.

Accepted Answer

A) 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 
B) discretion enables policy makers to change policy settings when an economy undergoes structural changes 
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) 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 
B) discretion enables policy makers to change policy settings when an economy undergoes structural changes 
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 15

Provide several ways that the central bank could establish credibility.

Accepted Answer

Some ways in which the central bank coul

Question 16

An example of a nominal anchor is ________.

Accepted Answer

A) the inflation rate 
B) the real interest rate 
C) government purchases 
D) the tax rate 
A) the inflation rate 
B) the real interest rate 
C) government purchases 
D) the tax rate

Question 17

According to the Lucas critique, if past increases in the short-term interest rate have always been temporary, then ________.

Accepted Answer

A) the term-structure relationship using past data will then show only a weak effect of changes in the short-term interest rate on the long-term rate 
B) the term-structure relationship using past data will show no effect of changes in the short-term interest rate on the long-term rate 
C) one cannot predict the term-structure relationship as it depends on expectations 
D) the term-structure relationship using past data will nevertheless show a strong effect of changes in the short-term interest rate on the long-term rate because of a change in the way expectations are formed 
A) the term-structure relationship using past data will then show only a weak effect of changes in the short-term interest rate on the long-term rate 
B) the term-structure relationship using past data will show no effect of changes in the short-term interest rate on the long-term rate 
C) one cannot predict the term-structure relationship as it depends on expectations 
D) the term-structure relationship using past data will nevertheless show a strong effect of changes in the short-term interest rate on the long-term rate because of a change in the way expectations are formed

Question 18

The interest rate thought to have the most important impact on aggregate demand is the ________.

Accepted Answer

A) short-term interest rate 
B) T-bill rate 
C) rate on 90-day CDs 
D) long-term interest rate 
A) short-term interest rate 
B) T-bill rate 
C) rate on 90-day CDs 
D) long-term interest rate

Question 19

Advocates of nondiscretionary policy contend that a discretionary policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output.

Accepted Answer

A) supply; less 
B) supply; more 
C) demand; less 
D) demand; more 
A) supply; less 
B) supply; more 
C) demand; less 
D) demand; more

Question 20

Approaches to establishing central bank credibility include ________.

Accepted Answer

A) continued success at keeping inflation under control 
B) inflation targeting 
C) exchange rate targeting 
D) all of the above 
A) continued success at keeping inflation under control 
B) inflation targeting 
C) exchange rate targeting 
D) all of the above

Exam 25: The Role of Expectations in Monetary Policy

The oil shock in 2007 ________.

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

How did Canada win the battle against inflation?

The oil crisis in the 1970s led to an unemployment rate of over ________ percent.

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

The Lucas critique highlighted the need for ________.

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 ________.

Which of the following formed part of the Bolivian government plan to reduce inflation?

If a negative aggregate demand shock occurs and monetary policy is not credible then ________.

The political business cycle can lead to ________.

Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible, then ________.

Today, most economists ________.

Approaches to establishing central bank credibility include ________.

Arguments for adopting a policy rule include ________.

Provide several ways that the central bank could establish credibility.

An example of a nominal anchor is ________.

According to the Lucas critique, if past increases in the short-term interest rate have always been temporary, then ________.

The interest rate thought to have the most important impact on aggregate demand is the ________.

Advocates of nondiscretionary policy contend that a discretionary policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output.

Approaches to establishing central bank credibility include ________.

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

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

Financial Crises in Emerging Markets

The ISLM Model

Non-Bank Finance

Filters

Advocates of nondiscretionary policy contend that a discretionary policy of shifting the aggregate curve will be costly because it produces volatility in both the price level and output.