Exam 16: Alternative Perspectives on Stabilization Policy

According to Christina Romer, the reduction in real economic volatility in the period since World War II compared to the period before World War I is the result of improved economic:

Given that the Philips curve defines an economy as u = 6 - 0.4(π - Eπ) where u is the unemployment rate and π is the inflation rate, and the loss function which tells the social cost of unemployment and inflation is L = u + 0.05π², calculate the optimal level of inflation for the economy taking expected inflation as given.

As U.S. Secretary of the Treasury, Alexander Hamilton opposed the time-inconsistent policy of:

Conducting monetary policy so that the overnight rate = π + 0.5(π - 2) + 0.5 (GDP gap), where the overnight rate is the nominal overnight interest rate, π is the annual inflation rate, and GDP gap is the percentage shortfall of real GDP from its natural level, is an example of:

Conducting monetary policy so that the overnight rate = 0.05, where the overnight rate is the nominal overnight interest rate, is an example of:

When a government honours its debt obligations, this is an example of:

According to advocates of rational expectations, traditional estimates of the sacrifice ratio are unreliable because they:

You are hired as a consultant to set up the central bank of a new country. Suggest at least two possible ways to structure the central bank to keep inflation levels low.

Policymakers may be better able to achieve their goals using a fixed policy rule rather than using discretion if they face the problem of:

The time between a policy action and its influence on the economy is called the:

The time-inconsistency problem in discretionary policymaking about unemployment and inflation can be effectively avoided when the:

Fiscal policy has a relatively long _____ lag, and monetary policy has a relatively long _____ lag.

Unlike a monetarist policy rule, an inflation target has the advantage of:

An argument in favour of allowing discretionary macroeconomic policy is that:

Countries with greater central-bank independence can achieve lower rates of inflation:

Policies that stimulate or depress the economy without any deliberate policy change are called:

Automatic stabilizers:

The Phillips curve describing an economy takes the form u = uⁿ - α(π - Eπ). The central bank directly sets the inflation rate to minimize the following loss function, L (u, π) = u + γπ². The symbol u denotes the unemployment rates, uⁿ is the natural rate of unemployment, π is the inflation rate, Eπ is the expected inflation rate, and α and γ are behavioural response parameters of the economy. Private agents form their expectations rationally before the central bank sets the inflation rate. In an economy in which the central bank dislikes inflation much more than unemployment:

A situation where policymakers have the incentive to deviate from their initial course of action once other agents in the economy have acted is called a(n):

The differing interpretations of the historical record of the Great Depression provide support for using: