G345 FINAL QUESTIONS AND ANSWERS
According to the text, the most important goal of monetary policy LOADING... is thought
to be:
A.
low interest rates
B.
eliminating deflation
C.
price stability
D.
high economic growth rates - Answers - price stability
Which of the following best illustrates the time-inconsistency problem LOADING...?
A.
A parent says that he or she will punish a child whenever the child breaks a rule.
Afterward, when the child misbehaves, the parent forgives the misbehavior because
punishment is unpleasant for both the parent and child.
B.
Your professor says that this course will end with a final exam. After you have studied
and learned all the material, you are surprised to find the exam easier than you
expected.
C.
A nation states that they will not negotiate over hostages. Once hostages are taken,
policymakers do not make any concessions to obtain the hostages' release.
D.
Both A and B are correct.
E.
All of the above are correct. - Answers - A parent says that he or she will punish a child
whenever the child breaks a rule. Afterward, when the child misbehaves, the parent
forgives the misbehavior because punishment is unpleasant for both the parent and
child.
"A central bank with a dual mandate will achieve lower unemployment in the long run
than a central bank with a hierarchical mandate in which price stability takes
precedence." Is this statement true or false? Explain your answer.
A.
True. Inflation targeting only allows a central bank to focus on inflation.
B.
False. Inflation targeting still allows central banks to constantly adjust for unemployment
concerns.
C.
False. There is no long-run trade-off between inflation and unemployment.
D.
,True. The short-run Phillips curve shows an inverse relationship between inflation and
unemployment. - Answers - False. There is no long-run trade-off between inflation and
unemployment.
The goals of a dual mandate can sometimes conflict because:
A.
policies that increase output and employment in the short run can create excessive
inflation in the long run
B.
low and stable rates of inflation detract from economic growth
C.
it is difficult to achieve both long-run price stability and the natural rate of unemployment
- Answers - policies that increase output and employment in the short run can create
excessive inflation in the long run
Why is a public announcement of numerical inflation rate objectives important to the
success of an inflation-targeting central bank?
A.
It reduces the costs of high inflation to society.
B.
It allows market participants to influence the inflation rate.
C.
It reduces uncertainty in inflation expectations of market participants.
D.
It imposes a rigid rule on monetary policymakers and thus limits any change in policy
actions. - Answers - It reduces uncertainty in inflation expectations of market
participants.
If inflation is currently low but policymakers believe inflation will rise over the next two
years with an unchanged stance of monetary policy, what should they do to prevent the
inflationary surge?
A.
They should tighten monetary policy before inflation surges.
B.
They should tighten monetary policy immediately after inflation surges.
C.
They should tighten monetary policy two years after the initial inflation surges.
D.
There is no monetary policy response that can affect inflation. - Answers - They should
tighten monetary policy before inflation surges.
Advantages of the Fed's "just do it" approach include:
A.
the strong dependence on the preferences, skills, and trustworthiness of the individuals
in charge of the central bank.
B.
, its forward-looking behavior and stress on price stability that help to discourage overly
expansionary monetary policy, thereby ameliorating the time-inconsistency problem.
C.
it does not rely on a stable money-inflation relationship.
D.
Only B and C are correct.
E.
All of the above are correct. - Answers - Only B and C are correct.
Which of the following is a reason why monetary policy should not be used to prick
asset-price bubbles?
A.
There are many different asset prices, and at any one time a bubble may be present in
only a fraction of assets.
B.
Monetary policy actions to prick bubbles can have harmful effects on the aggregate
economy.
C.
The effect of raising interest rates on asset prices is highly uncertain.
D.
All of the above are correct.
E.
None of the above are correct. - Answers - All of the above are correct.
What procedures can the Fed use to control the federal funds rate?
A.
Open market operations.
B.
Inflation targeting.
C.
The Taylor rule.
D.
None of the above are correct. - Answers - Open market operations.
Why does control of this interest rate imply that the Fed will lose control of nonborrowed
reserves?
A.
The Fed has to adjust reserves in response to changes in reserve demand to keep
interest rates at the target.
B.
The Fed lacks control over both the nominal and real interest rates, so it cannot control
everything.
C.
The Fed has to change the amount of discount loans it makes when it sets an interest-
rate target.
D.
According to the text, the most important goal of monetary policy LOADING... is thought
to be:
A.
low interest rates
B.
eliminating deflation
C.
price stability
D.
high economic growth rates - Answers - price stability
Which of the following best illustrates the time-inconsistency problem LOADING...?
A.
A parent says that he or she will punish a child whenever the child breaks a rule.
Afterward, when the child misbehaves, the parent forgives the misbehavior because
punishment is unpleasant for both the parent and child.
B.
Your professor says that this course will end with a final exam. After you have studied
and learned all the material, you are surprised to find the exam easier than you
expected.
C.
A nation states that they will not negotiate over hostages. Once hostages are taken,
policymakers do not make any concessions to obtain the hostages' release.
D.
Both A and B are correct.
E.
All of the above are correct. - Answers - A parent says that he or she will punish a child
whenever the child breaks a rule. Afterward, when the child misbehaves, the parent
forgives the misbehavior because punishment is unpleasant for both the parent and
child.
"A central bank with a dual mandate will achieve lower unemployment in the long run
than a central bank with a hierarchical mandate in which price stability takes
precedence." Is this statement true or false? Explain your answer.
A.
True. Inflation targeting only allows a central bank to focus on inflation.
B.
False. Inflation targeting still allows central banks to constantly adjust for unemployment
concerns.
C.
False. There is no long-run trade-off between inflation and unemployment.
D.
,True. The short-run Phillips curve shows an inverse relationship between inflation and
unemployment. - Answers - False. There is no long-run trade-off between inflation and
unemployment.
The goals of a dual mandate can sometimes conflict because:
A.
policies that increase output and employment in the short run can create excessive
inflation in the long run
B.
low and stable rates of inflation detract from economic growth
C.
it is difficult to achieve both long-run price stability and the natural rate of unemployment
- Answers - policies that increase output and employment in the short run can create
excessive inflation in the long run
Why is a public announcement of numerical inflation rate objectives important to the
success of an inflation-targeting central bank?
A.
It reduces the costs of high inflation to society.
B.
It allows market participants to influence the inflation rate.
C.
It reduces uncertainty in inflation expectations of market participants.
D.
It imposes a rigid rule on monetary policymakers and thus limits any change in policy
actions. - Answers - It reduces uncertainty in inflation expectations of market
participants.
If inflation is currently low but policymakers believe inflation will rise over the next two
years with an unchanged stance of monetary policy, what should they do to prevent the
inflationary surge?
A.
They should tighten monetary policy before inflation surges.
B.
They should tighten monetary policy immediately after inflation surges.
C.
They should tighten monetary policy two years after the initial inflation surges.
D.
There is no monetary policy response that can affect inflation. - Answers - They should
tighten monetary policy before inflation surges.
Advantages of the Fed's "just do it" approach include:
A.
the strong dependence on the preferences, skills, and trustworthiness of the individuals
in charge of the central bank.
B.
, its forward-looking behavior and stress on price stability that help to discourage overly
expansionary monetary policy, thereby ameliorating the time-inconsistency problem.
C.
it does not rely on a stable money-inflation relationship.
D.
Only B and C are correct.
E.
All of the above are correct. - Answers - Only B and C are correct.
Which of the following is a reason why monetary policy should not be used to prick
asset-price bubbles?
A.
There are many different asset prices, and at any one time a bubble may be present in
only a fraction of assets.
B.
Monetary policy actions to prick bubbles can have harmful effects on the aggregate
economy.
C.
The effect of raising interest rates on asset prices is highly uncertain.
D.
All of the above are correct.
E.
None of the above are correct. - Answers - All of the above are correct.
What procedures can the Fed use to control the federal funds rate?
A.
Open market operations.
B.
Inflation targeting.
C.
The Taylor rule.
D.
None of the above are correct. - Answers - Open market operations.
Why does control of this interest rate imply that the Fed will lose control of nonborrowed
reserves?
A.
The Fed has to adjust reserves in response to changes in reserve demand to keep
interest rates at the target.
B.
The Fed lacks control over both the nominal and real interest rates, so it cannot control
everything.
C.
The Fed has to change the amount of discount loans it makes when it sets an interest-
rate target.
D.
