Question 1

A central bank that follows the Taylor rule

Accepted Answer

A) will not react to economic disturbances until its full effects are felt 
B) assumes there is no tradeoff between unemployment and inflation 
C) keeps the growth rate of money supply constant 
D) sets interest rates based on current economic conditions 
E) will start selling government bonds as soon as interest rates start to rise

Question 2

Which of the following is FALSE?

Accepted Answer

A) in the long run, a central bank can effectively limit inflation 
B) in the long run, a central bank can do fairly little to stimulate real GDP 
C) in the long run, monetary policy has no effect on nominal GDP 
D) unless inflation is very high, stimulating the economy does more to enhance economic welfare than controlling inflation 
E) a central bank can lower the inflation rate but only by allowing for a loss in real GDP, at least in the short run

Question 3

If the inflation rate starts to increase, a central bank most likely will

Accepted Answer

A) try to stimulate aggregate supply through open market purchases 
B) change short-term interest rates though open market sales 
C) increase short-term interest rates by buying government bonds 
D) send signals to financial markets about upcoming open market purchases 
E) ask banks to ration credit

Question 4

Monetary policy is best conducted by

Accepted Answer

A) focusing on a sustainable goal rather than maintaining full employment at all times 
B) decisive major policy changes rather than modest steps 
C) changing policies frequently to keep financial markets guessing what will happen next 
D) keeping the interest rate at the lowest sustainable level no matter what 
E) none of the above

Question 5

The Taylor rule suggests to a central bank

Accepted Answer

A) how to set interest rates in response to a change in economic activity 
B) that interest rates should be raised by 1.5% if inflation goes 1% above its announced target 
C) that interest rates should be raised by 0.5% if the GDP gap rises by 1% 
D) that real interest rates should be increased to cool off the economy whenever inflation rises 
E) all of the above

Question 6

When a central bank engages in inflation targeting

Accepted Answer

A) unemployment isn't affected since nominal interest rates are kept very low 
B) interest rates are raised substantially as soon as the output gap increases 
C) interest rate stability is an explicit policy goal 
D) little weight is give to transparency 
E) little or no weight is given to the output gap

Question 7

According to the Taylor rule, if the current inflation rate is 2.8%, output is 2% below 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)8% 
B) 4)2% 
C) 5)2% 
D) 5)8% 
E) 6)8%

Question 8

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 2% below 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%

Question 9

An appropriate policy response by a central bank to an increase in the inflation rate is to

Accepted Answer

A) increase bank reserves 
B) lower the federal funds rate 
C) buy government bonds from the public 
D) sell government bonds to the public 
E) none of the above

Question 10

Assume the central bank's announced inflation target is 2%, output is 2% below the full-employment level, and the Taylor rule suggests that the central bank sets the nominal interest rate at 4.5%.What is most likely the current inflation rate?

Accepted Answer

A) 3)0% 
B) 3)6% 
C) 4)0% 
D) 4)5% 
E) 6)0%

Question 11

If a central bank engages in inflation targeting, then

Accepted Answer

A) it will not change interest rates in response to output fluctuations 
B) it will change interest rates aggressively as soon as inflation or output changes 
C) it will lower interest rates aggressively as soon as inflation heats up 
D) it will increase interest rates aggressively as soon as aggregate supply increases 
E) none of the above

Question 12

Which of the following is TRUE about the chair of the Board of Governors of the U.S.Federal Reserve?

Accepted Answer

A) Paul Volcker succeeded Alan Greenspan 
B) Ben Bernanke succeeded Paul Volcker 
C) Ben Bernanke served only four years as the chair 
D) Janet Yellen is the first woman in the position of Fed's board chair 
E) none of the above

Question 13

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

Accepted Answer

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

Question 14

If it is clear that an economic disturbance is only transitory, a central bank's best policy response may be to

Accepted Answer

A) react moderately or not at all because a major policy change may itself be destabilizing 
B) recommend fiscal policy changes, which will have less powerful effects than monetary policy changes 
C) act quickly and vigorously so financial markets do not overreact 
D) announce a policy change and then wait to see the reaction of financial markets before deciding whether or not to actually implement it 
E) avoid a potential increase in inflation by asking banks to ration credit

Question 15

The Taylor rule

Accepted Answer

A) allows for strict inflation targeting as long as the output coefficient is zero 
B) should only be followed if the economy is growing strongly 
C) suggests changes in money growth in response to changes in the inflation rate 
D) does not allow for strict inflation targeting 
E) implies a strict monetary growth rule

Question 16

In the short run, a central bank can most easily stimulate economic activity by

Accepted Answer

A)  selling government bonds to the public 
B)  raising interest rates to make investments more profitable 
C)  lowering the inflation rate though monetary restriction 
D)  influencing aggregate supply through monetary expansion 
E)   influencing aggregate demand and accepting a higher price level in the future

Question 17

Assume the central bank announced a 2% inflation target and has set the nominal interest rate at 5.0%.If actual inflation is 2.8%, by how much is output off the full-employment level?

Accepted Answer

A) -1.2% 
B) -0.8% 
C) -0.4% 
D) +0.4% 
E) +1.2%

Question 18

Assume the current inflation rate is 2.4% and output is at the full-employment level.If the central bank has set nominal interest rates at 5.6%, what is the central bank's inflation target if it follows the Taylor rule?

Accepted Answer

A) 0% 
B) 1% 
C) 2% 
D) 3% 
E) 4%

Question 19

By lowering short-term interest rates, a central bank can stimulate economic activity

Accepted Answer

A) since it encourages more investment spending 
B) since more durable consumption goods will be bought 
C) but only in the short run 
D) but it may lead to a higher price level 
E) all of the above

Question 20

Slowing economic activity by increasing interest rates will generally be successful since

Accepted Answer

A) investment spending will be reduced 
B) spending on durable goods will be reduced 
C) aggregate supply will decrease 
D) all of the above 
E) only A and B

Exam 9: Policy preview