Question 1

The Taylor rule allows for strict inflation targeting as long as

Accepted Answer

A)  the output coefficient is zero
B)  the inflation coefficient is zero
C)  the output coefficient is negative
D)  the inflation coefficient is negative
E)  none of the above A

Question 2

Many economists believe that

Accepted Answer

A)  most short-term stabilization of the economy should be done through monetary policy
B)  fiscal policy has no short-run effect on either output or inflation
C)  monetary policy affects inflation but not output, even in the short run
D)  monetary policy can effectively increase GDP with little or no effect on inflation
E)  none of the above is true A

Question 3

If a central bank wants to make sure that its policy actions are successful in manipulating interest rates to stabilize the economy around its full-employment level it should

Accepted Answer

A)  be prepared to make modest and frequent adjustments after receiving feedback on how its actions affect the economy
B)  never announce its intentions, because financial markets will always overreact
C)  frequently change its policies to keep financial markets guessing
D)  react to excess inflation but not to economic booms
E)  all of the above A

Question 4

Which of the following equations most accurately describes the Taylor rule?

Accepted Answer

A)    πt = mt – yt + vt	
B)   	mt = 0.04 + 2(ut – 0.052) 
C)    mt = πt + 0.5(πt – π*t)  + 0.5(Yt –Y*t) 
D)   	it = 2 + πt + 0.5(πt – π*t)  + 0.5[100(Yt –Y*t) /Y*t]
E)    	it = 2 + 0.5[(πt – π*t) /πt] + 0.5[(Yt –Y*t) /Y*t]

Question 5

The U.S.Federal Reserve's Open Market Committee (the FOMC)

Accepted Answer

A)  meets regularly to decide on its monetary policy actions
B)  formally makes decision by voting on monetary policy changes
C)  sometimes reveals its intentions in advance to increase transparency
D)  does not follow a clearly established policy rule
E)  all of the above

Question 6

If a central bank wants to avoid high inflation in an economic boom it can

Accepted Answer

A)  try to lower investment spending though open market purchases
B)  raise interest rates in an effort to affect aggregate supply
C)  lower bank reserves by buying government bonds
D)  decrease the level of potential GDP by permanently restricting money supply growth
E)  none of the above

Question 7

In the Taylor rule, if the output coefficient ? is set to zero, then the central bank

Accepted Answer

A)  is mostly concerned with maintaining a low inflation rate
B)  will lower interest rates whenever it goes above 2 percent
C)  will aggressively increase interest rates as soon as inflation rises
D)  engages in real GDP targeting
E)  none of the above

Question 8

In the Taylor rule, if the inflation coefficient ? is much larger than the output coefficient ?, then the central bank

Accepted Answer

A)  is mostly concerned with maintaining full-employment
B)  will raise interest rates more aggressively when output declines than when inflation heats up
C)  will lower interest rates more aggressively when output declines than when inflation heats up
D)  is engaging in strict inflation targeting
E)  none of the above

Question 9

In the Taylor rule, if the output coefficient ? is set to zero, then the central bank

Accepted Answer

A)  is mostly concerned with maintaining full employment
B)  always sets interest rates 2% above its inflation target
C)  will aggressively lower interest rates as soon as output declines
D)  engages in strict inflation targeting
E)  none of the above

Question 10

Which of the following is NOT a way in which a central bank can conduct its monetary policy?

Accepted Answer

A)  by establishing target interest rates and then undertaking open market operations to maintain them
B)  by buying and selling government bonds
C)  by making small policy changes and readjusting policies as needed
D)  by changing the rate of capital accumulation to influence aggregate supply
E)  by changing interest rates to influence spending on durable goods and investment

Question 11

According to the Taylor rule, if the current inflation rate is 3.2%, output is 1% above the full-employment level, and the central bank's announced inflation target is 2%, at what level should the central bank set the nominal interest rate?

Accepted Answer

A)  2) 2%
B)  3) 3%
C)  4) 4%
D)  5) 8%
E)  6) 3%

Question 12

Central banks generally conduct their monetary policy with two goals in mind: to keep economic activity high and to keep inflation low; however, they have to recognize that

Accepted Answer

A)  there is an inherent conflict between these goals
B)  monetary policy can affect economic activity only in the short run
C)  they can control inflation fairly effectively but may not be able to influence GDP growth
D)  a lower interest rate now may mean higher a inflation rate in the future
E)  all of the above

Question 13

Assume that the inflation coefficient is negative in the Taylor rule, This implies that

Accepted Answer

A)  there is an implicit monetary policy tradeoff between inflation and unemployment
B)  the Fed will have to lower money supply whenever aggregate demand decreases
C)  the Fed will not have to make adjustments in interest rates if output changes
D)  the economy is likely to experience runaway inflation
E)  all of the above

Question 14

The federal funds rate is the interest rate that

Accepted Answer

A)  banks charge their best corporate customers
B)  banks have to pay when they get a loan from the Fed
C)  banks have to pay when they get a loan from another bank
D)  banks receive from the Fed for the reserves they hold as deposits at the Fed
E)  the federal government pays on its three-month Treasury bills

Question 15

Assume the Fed wants to stimulate economic activity through expansionary monetary policy.Which of the following is FALSE?

Accepted Answer

A)  investment spending will increase
B)  spending on durable goods will increase
C)  aggregate demand will be stimulated
D)  the expansionary effect will only be temporary
E)  real money balances will increase as we move along the AD-curve from left to right

Question 16

If a central bank is uncertain about whether an economic disturbance is temporary or permanent, it should

Accepted Answer

A)  always wait until the full effect of the disturbance is felt before undertaking any policy changes
B)  make frequent and modest policy changes and adjust policies whenever necessary to reach a sustainable goal
C)  announce and then implement major policy changes right away to signal to financial markets that it will address the disturbance vigorously
D)  announce a policy change and then wait for financial markets to react, which is often all that is needed to calm economic activity
E)  do all of the above

Question 17

When conducting expansionary monetary policy, central banks have to keep in mind that

Accepted Answer

A)  there is a conflict between keeping inflation low and economic activity high
B)  unemployment can be lowered in the short run but at the cost of higher prices in the long run
C)  spending on durable consumption goods will probably not be significantly affected
D)  all of the above
E)  only A and B

Question 18

A central bank that wants to stabilize the economy in the short run should try to

Accepted Answer

A)  establish a clear inflation target and stick to it no matter what
B)  affect aggregate supply through open market operations
C)  affect aggregate demand through open market operations
D)  maintain a stable growth rate of money supply
E)  concentrate only on long-run goals

Question 19

The U.S.Fed "sets" interest rates by

Accepted Answer

A)  announcing a desired discount rate and then attempting to keep the federal funds rate two percentage points above it
B)  announcing a desired monetary growth rate designed to keep inflation stable
C)  buying or selling Treasury bills
D)  announcing its intentions far in advance since transparency allows financial markets to adjust before any action is taken
E)  trying to keep bank reserves stable

Question 20

According to the Taylor rule, if the central bank announced a zero percent inflation target but the current inflation rate is 2% and output is at the full-employment level, at what level should the central bank set the nominal interest rate?

Accepted Answer

A)  1%
B)  2%
C)  3%
D)  4%
E)  5%

Exam 9: Policy preview

The Taylor rule allows for strict inflation targeting as long as

Many economists believe that

If a central bank wants to make sure that its policy actions are successful in manipulating interest rates to stabilize the economy around its full-employment level it should

Which of the following equations most accurately describes the Taylor rule?

The U.S.Federal Reserve's Open Market Committee (the FOMC)

If a central bank wants to avoid high inflation in an economic boom it can

In the Taylor rule, if the output coefficient ? is set to zero, then the central bank

In the Taylor rule, if the inflation coefficient ? is much larger than the output coefficient ?, then the central bank

In the Taylor rule, if the output coefficient ? is set to zero, then the central bank

Which of the following is NOT a way in which a central bank can conduct its monetary policy?

According to the Taylor rule, if the current inflation rate is 3.2%, output is 1% above the full-employment level, and the central bank's announced inflation target is 2%, at what level should the central bank set the nominal interest rate?

Central banks generally conduct their monetary policy with two goals in mind: to keep economic activity high and to keep inflation low; however, they have to recognize that

Assume that the inflation coefficient is negative in the Taylor rule, This implies that

The federal funds rate is the interest rate that

Assume the Fed wants to stimulate economic activity through expansionary monetary policy.Which of the following is FALSE?

If a central bank is uncertain about whether an economic disturbance is temporary or permanent, it should

When conducting expansionary monetary policy, central banks have to keep in mind that

A central bank that wants to stabilize the economy in the short run should try to

The U.S.Fed "sets" interest rates by

According to the Taylor rule, if the central bank announced a zero percent inflation target but the current inflation rate is 2% and output is at the full-employment level, at what level should the central bank set the nominal interest rate?