Question 1

The time inconsistency problem with respect to policy conduct means ________.

Accepted Answer

A) the tendency to deviate from long-run plans when making short run decisions 
B) implementing a constant growth rate rule 
C) that politicians are not elected for long enough time frames 
D) there is no room for hard and fast monetary rules 
A) the tendency to deviate from long-run plans when making short run decisions 
B) implementing a constant growth rate rule 
C) that politicians are not elected for long enough time frames 
D) there is no room for hard and fast monetary rules

Question 2

Monetarists believe all of the following except that ________.

Accepted Answer

A) active government policies are required to restore the economy to full employment 
B) the Bank of Canada should adopt and follow a money growth rule 
C) the self-correcting mechanism works quickly because wages are sufficiently flexible 
D) the aggregate supply curve shifts quickly to restore the economy to the natural rate of unemployment 
A) active government policies are required to restore the economy to full employment 
B) the Bank of Canada should adopt and follow a money growth rule 
C) the self-correcting mechanism works quickly because wages are sufficiently flexible 
D) the aggregate supply curve shifts quickly to restore the economy to the natural rate of unemployment

Question 3

The reason Canada fared differently between the first two oil shocks and the third is because ________.

Accepted Answer

A) a nominal anchor was in place during the third oil shock in 2007 
B) by 2007 Canada became a net exporter of oil, so Canadians benefitted from higher oil prices 
C) in 2007, the global financial crisis overshadowed any oil price shocks 
D) none of the above 
A) a nominal anchor was in place during the third oil shock in 2007 
B) by 2007 Canada became a net exporter of oil, so Canadians benefitted from higher oil prices 
C) in 2007, the global financial crisis overshadowed any oil price shocks 
D) none of the above

Question 4

The Bank of Canada has not always had a reputation for garnering credibility. These include countervailing monetary policies in ________.

Accepted Answer

A) early 1970s 
B) early 1960s 
C) the course of the Coyne affair 
D) during the global financial crisis 
A) early 1970s 
B) early 1960s 
C) the course of the Coyne affair 
D) during the global financial crisis

Question 5

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 6

A rise in short-term interest rates that is believed to be only temporary ________.

Accepted Answer

A) is likely to have a significant effect on long-term interest rates 
B) will have a bigger impact on long-term interest rates than if the rise in short-term rates had been permanent 
C) is likely to have only a small impact on long-term interest rates 
D) cannot possibly affect long-term interest rates 
A) is likely to have a significant effect on long-term interest rates 
B) will have a bigger impact on long-term interest rates than if the rise in short-term rates had been permanent 
C) is likely to have only a small impact on long-term interest rates 
D) cannot possibly affect long-term interest rates

Question 7

The Lucas critique is an attack on the usefulness of ________.

Accepted Answer

A) conventional econometric models as forecasting tools 
B) conventional econometric models as indicators of the potential impacts on the economy of particular policies 
C) rational expectations models of macroeconomic activity 
D) the relationship between the quantity theory of money and aggregate demand 
A) conventional econometric models as forecasting tools 
B) conventional econometric models as indicators of the potential impacts on the economy of particular policies 
C) rational expectations models of macroeconomic activity 
D) the relationship between the quantity theory of money and aggregate demand

Question 8

Which of the following views are consistent with the case for nondiscretionary macroeconomic policy?

Accepted Answer

A) Even with time lags, discretionary policy moves the economy to full employment before the economy's self-correcting mechanism would. 
B) The wage and price adjustment process being extremely slow, a nondiscretionary policy results in a large loss of output. 
C) Workers will come to expect expansionary policies whenever the economy moves below full employment. 
D) A discretionary, accommodating policy of shifting the aggregate demand curve will produce less volatility in both the price level and output due to the short time it takes to shift aggregate demand. 
A) Even with time lags, discretionary policy moves the economy to full employment before the economy's self-correcting mechanism would. 
B) The wage and price adjustment process being extremely slow, a nondiscretionary policy results in a large loss of output. 
C) Workers will come to expect expansionary policies whenever the economy moves below full employment. 
D) A discretionary, accommodating policy of shifting the aggregate demand curve will produce less volatility in both the price level and output due to the short time it takes to shift aggregate demand.

Question 9

If expectations about policy affect how wages are set, then the case for a(n)________ policy is much stronger.

Accepted Answer

A) discretionary 
B) nondiscretionary 
C) interventionist 
D) stabilization 
A) discretionary 
B) nondiscretionary 
C) interventionist 
D) stabilization

Question 10

in the 1970s when faced with inflation shocks, the Bank of Canada ________.

Accepted Answer

A) increased the growth rate of the monetary aggregates 
B) decreased the growth rate of monetary aggregates 
C) began to accept the Lucas critique 
D) instituted contractionary monetary policy 
A) increased the growth rate of the monetary aggregates 
B) decreased the growth rate of monetary aggregates 
C) began to accept the Lucas critique 
D) instituted contractionary monetary policy

Question 11

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 12

Milton Friedman and his followers are known as ________.

Accepted Answer

A) monetarists 
B) activists 
C) Keynesians 
D) neo-Keynesians 
A) monetarists 
B) activists 
C) Keynesians 
D) neo-Keynesians

Question 13

With a positive aggregate demand shock, monetary policy credibility can ________.

Accepted Answer

A) stabilize inflation 
B) set inflation equal to zero 
C) determine the effective interest rate 
D) prevent financial malfeasance 
A) stabilize inflation 
B) set inflation equal to zero 
C) determine the effective interest rate 
D) prevent financial malfeasance

Question 14

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

Accepted Answer

A) a policy of variable money supply growth 
B) supply-side policy 
C) demand-management policy 
D) a constant-money-growth-rate rule 
A) a policy of variable money supply growth 
B) supply-side policy 
C) demand-management policy 
D) a constant-money-growth-rate rule

Question 15

The Lucas critique indicates that ________.

Accepted Answer

A) Keynesian criticisms of rational expectations models are well-founded 
B) Keynesian criticisms of rational expectations models are not well-founded 
C) expectations are important in determining the outcome of an activist policy 
D) expectations are not important in determining the outcome of an activist policy 
A) Keynesian criticisms of rational expectations models are well-founded 
B) Keynesian criticisms of rational expectations models are not well-founded 
C) expectations are important in determining the outcome of an activist policy 
D) expectations are not important in determining the outcome of an activist policy

Question 16

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 17

A policy in which the money supply is kept growing at a constant rate regardless of the state of the economy is ________.

Accepted Answer

A) a Taylor rule 
B) a discretionary policy 
C) a policy rule advocated by monetarists 
D) advocated by activists 
A) a Taylor rule 
B) a discretionary policy 
C) a policy rule advocated by monetarists 
D) advocated by activists

Question 18

The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as ________.

Accepted Answer

A) the monetarist revolution 
B) the Lucas critique 
C) public choice theory 
D) new Keynesian theory 
A) the monetarist revolution 
B) the Lucas critique 
C) public choice theory 
D) new Keynesian theory

Question 19

A positive aggregate demand shock will only impact ________.

Accepted Answer

A) the equilibrium output 
B) the equilibrium inflation rate 
C) the short run aggregate supply curve 
D) none of the above 
A) the equilibrium output 
B) the equilibrium inflation rate 
C) the short run aggregate supply curve 
D) none of the above

Question 20

Provide some alternate approaches to establishing credibility.

Accepted Answer

To achieve credibility, the central bank

Exam 25: The Role of Expectations in Monetary Policy

The time inconsistency problem with respect to policy conduct means ________.

Monetarists believe all of the following except that ________.

The reason Canada fared differently between the first two oil shocks and the third is because ________.

The Bank of Canada has not always had a reputation for garnering credibility. These include countervailing monetary policies in ________.

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

A rise in short-term interest rates that is believed to be only temporary ________.

The Lucas critique is an attack on the usefulness of ________.

Which of the following views are consistent with the case for nondiscretionary macroeconomic policy?

If expectations about policy affect how wages are set, then the case for a(n)________ policy is much stronger.

in the 1970s when faced with inflation shocks, the Bank of Canada ________.

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

Milton Friedman and his followers are known as ________.

With a positive aggregate demand shock, monetary policy credibility can ________.

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

The Lucas critique indicates that ________.

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

A policy in which the money supply is kept growing at a constant rate regardless of the state of the economy is ________.

The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as ________.

A positive aggregate demand shock will only impact ________.

Provide some alternate approaches to establishing credibility.

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

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