Question 1

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. C

Question 2

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. C

Question 3

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target.But if the commitment is not credible,then

Accepted Answer

A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will rise. 
C) economic contraction will be worse. 
D) all of the above. 
E) both B and C. 
A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will rise. 
C) economic contraction will be worse. 
D) all of the above. 
E) both B and C. E

Question 4

Lucas argues that when policies change,expectations will change thereby

Accepted Answer

A) changing the relationships in econometric models. 
B) causing the government to abandon its discretionary stance. 
C) forcing the Fed to keep its deliberations secret. 
D) making it easier to predict the effects of policy changes. 
A) changing the relationships in econometric models. 
B) causing the government to abandon its discretionary stance. 
C) forcing the Fed to keep its deliberations secret. 
D) making it easier to predict the effects of policy changes.

Question 5

Arguments for adopting a policy rule include

Accepted Answer

A) the time-inconsistency problem can lead to poor economic outcomes. 
B) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
C) policy makers and politicians cannot be trusted. 
D) all of the above. 
A) the time-inconsistency problem can lead to poor economic outcomes. 
B) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
C) policy makers and politicians cannot be trusted. 
D) all of the above.

Question 6

Whether one views the discretionary policies of the 1960s and 1970s as destabilizing or believes the economy would have been less stable without these policies,most economists agree that

Accepted Answer

A) stabilization policies proved more difficult in practice than many economists had expected. 
B) stabilization policies proved not to be inflationary. 
C) the nondiscretionary policymakers were right in believing that the private economy is inherently stable. 
D) the discretionary policymakers were right in believing that the private economy is inherently stable. 
A) stabilization policies proved more difficult in practice than many economists had expected. 
B) stabilization policies proved not to be inflationary. 
C) the nondiscretionary policymakers were right in believing that the private economy is inherently stable. 
D) the discretionary policymakers were right in believing that the private economy is inherently stable.

Question 7

Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is credible,then

Accepted Answer

A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will not shift. 
C) over time inflation will fall back down to the inflation target. 
D) all of the above. 
E) both A and B. 
A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will not shift. 
C) over time inflation will fall back down to the inflation target. 
D) all of the above. 
E) both A and B.

Question 8

Approaches to establishing central bank credibility include

Accepted Answer

A) continued success at keeping inflation under control. 
B) inflation targeting. 
C) exchange rate targeting. 
D) all of the above. 
A) continued success at keeping inflation under control. 
B) inflation targeting. 
C) exchange rate targeting. 
D) all of the above.

Question 9

Potential weaknesses of nominal GDP targeting include

Accepted Answer

A) it requires accurate estimates of potential GDP growth,which are not easy to achieve. 
B) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. 
C) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
D) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP. 
A) it requires accurate estimates of potential GDP growth,which are not easy to achieve. 
B) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. 
C) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
D) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP.

Question 10

Potential advantages of nominal GDP targeting include

Accepted Answer

A) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. 
B) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
C) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP. 
D) all of the above. 
A) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. 
B) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
C) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP. 
D) all of the above.

Question 11

Arguments for adopting a policy rule include

Accepted Answer

A) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. 
B) discretion enables policy makers to change policy settings when an economy undergoes structural changes. 
C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
D) all of the above. 
A) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. 
B) discretion enables policy makers to change policy settings when an economy undergoes structural changes. 
C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
D) all of the above.

Question 12

The rational expectations hypothesis implies that when macroeconomic policy changes

Accepted Answer

A) the economy will become highly unstable. 
B) the way expectations are formed will change. 
C) people will be slow to catch on to the change. 
D) people will make systematic mistakes. 
A) the economy will become highly unstable. 
B) the way expectations are formed will change. 
C) people will be slow to catch on to the change. 
D) people will make systematic mistakes.

Question 13

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is credible,then

Accepted Answer

A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will rise. 
C) over time inflation will fall. 
D) all of the above. 
E) both A and C. 
A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will rise. 
C) over time inflation will fall. 
D) all of the above. 
E) both A and C.

Question 14

Approaches to establishing central bank credibility include

Accepted Answer

A) continued success at keeping inflation under control. 
B) central bank independence. 
C) appointment of a more conservative central banker. 
D) all of the above. 
A) continued success at keeping inflation under control. 
B) central bank independence. 
C) appointment of a more conservative central banker. 
D) all of the above.

Question 15

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 16

________ imposes a conceptual structure and inherent discipline on policy makers,but without eliminating all flexibility.

Accepted Answer

A) Constrained discretion 
B) A policy rule 
C) A discretionary policy 
D) The Taylor rule 
A) Constrained discretion 
B) A policy rule 
C) A discretionary policy 
D) The Taylor rule

Question 17

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 18

Arguments for discretionary policies include

Accepted Answer

A) policy rules can be too rigid because they cannot foresee every contingency. 
B) the time-inconsistency problem can lead to poor economic outcomes. 
C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
D) all of the above. 
A) policy rules can be too rigid because they cannot foresee every contingency. 
B) the time-inconsistency problem can lead to poor economic outcomes. 
C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
D) all of the above.

Question 19

Arguments for discretionary policies include

Accepted Answer

A) policy rules can be too rigid because they cannot foresee every contingency. 
B) policy rules do not easily incorporate the use of judgment. 
C) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. 
D) discretion enables policy makers to change policy settings when an economy undergoes structural changes. 
E) all of the above. 
A) policy rules can be too rigid because they cannot foresee every contingency. 
B) policy rules do not easily incorporate the use of judgment. 
C) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. 
D) discretion enables policy makers to change policy settings when an economy undergoes structural changes. 
E) all of the above.

Question 20

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.

Exam 29: The Role of Expectations in Monetary Policy

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

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

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target.But if the commitment is not credible,then

Lucas argues that when policies change,expectations will change thereby

Arguments for adopting a policy rule include

Whether one views the discretionary policies of the 1960s and 1970s as destabilizing or believes the economy would have been less stable without these policies,most economists agree that

Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is credible,then

Approaches to establishing central bank credibility include

Potential weaknesses of nominal GDP targeting include

Potential advantages of nominal GDP targeting include

Arguments for adopting a policy rule include

The rational expectations hypothesis implies that when macroeconomic policy changes

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is credible,then

Approaches to establishing central bank credibility include

The Lucas critique is an attack on the usefulness of

________ imposes a conceptual structure and inherent discipline on policy makers,but without eliminating all flexibility.

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

Arguments for discretionary policies include

Arguments for discretionary policies include

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

Why Study Money,banking,and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behavior 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

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Nonbank Finance

Financial Derivatives

Conflicts of Interest in the Financial Industry

Central Banks and the Federal Reserve System

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

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

Financial Crises in Emerging Market Economies

The IS Curve

The Monetary Policy and Aggregate Demand Curves

The ISLM Model

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