Question 1

A credible nominal anchor

Accepted Answer

A) can help overcome the time-inconsistency problem by providing an expected constraint on discretionary policy. 
B) can help to anchor inflation expectations,which leads to smaller fluctuations in inflation. 
C) is required for a policy rule. 
D) all of the above. 
E) both A and B. 
A) can help overcome the time-inconsistency problem by providing an expected constraint on discretionary policy. 
B) can help to anchor inflation expectations,which leads to smaller fluctuations in inflation. 
C) is required for a policy rule. 
D) all of the above. 
E) both A and B.

Question 2

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) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
C) it is more complicated to explain to the public than inflation targeting and thus the public might be confused about the objectives of the central bank. 
D) both A and C. 
A) it requires accurate estimates of potential GDP growth,which are not easy to achieve. 
B) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
C) it is more complicated to explain to the public than inflation targeting and thus the public might be confused about the objectives of the central bank. 
D) both A and C.

Question 3

According to the Lucas critique,if past increases in the short-term interest rate have always been temporary,then

Accepted Answer

A) the term-structure relationship using past data will then show only a weak effect of changes in the short-term interest rate on the long-term rate. 
B) the term-structure relationship using past data will show no effect of changes in the short-term interest rate on the long-term rate. 
C) one cannot predict the term-structure relationship as it depends on expectations. 
D) the term-structure relationship using past data will nevertheless show a strong effect of changes in the short-term interest rate on the long-term rate because of a change in the way expectations are formed. 
A) the term-structure relationship using past data will then show only a weak effect of changes in the short-term interest rate on the long-term rate. 
B) the term-structure relationship using past data will show no effect of changes in the short-term interest rate on the long-term rate. 
C) one cannot predict the term-structure relationship as it depends on expectations. 
D) the term-structure relationship using past data will nevertheless show a strong effect of changes in the short-term interest rate on the long-term rate because of a change in the way expectations are formed.

Question 4

The Lucas critique indicates that

Accepted Answer

A) advocates of discretionary policies' criticisms of rational expectations models are well-founded. 
B) advocates of discretionary policies' criticisms of rational expectations models are not well-founded. 
C) expectations are important in determining the outcome of a discretionary policy. 
D) expectations are not important in determining the outcome of a discretionary policy. 
A) advocates of discretionary policies' criticisms of rational expectations models are well-founded. 
B) advocates of discretionary policies' criticisms of rational expectations models are not well-founded. 
C) expectations are important in determining the outcome of a discretionary policy. 
D) expectations are not important in determining the outcome of a discretionary policy.

Question 5

Approaches to establishing central bank credibility include

Accepted Answer

A) inflation targeting. 
B) exchange rate targeting. 
C) central bank independence. 
D) appointment of a more conservative central banker. 
E) all of the above. 
A) inflation targeting. 
B) exchange rate targeting. 
C) central bank independence. 
D) appointment of a more conservative central banker. 
E) all of the above.

Question 6

Suppose that there is a positive 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) 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 rise. 
C) over time inflation will fall back down to the inflation target. 
D) all of the above. 
E) both A and B.

Question 7

The interest rate thought to have the most important impact on aggregate demand is the

Accepted Answer

A) short-term interest rate. 
B) T-bill rate. 
C) rate on 90-day CDs. 
D) long-term interest rate. 
A) short-term interest rate. 
B) T-bill rate. 
C) rate on 90-day CDs. 
D) long-term interest rate.

Question 8

Potential weaknesses of nominal GDP targeting include

Accepted Answer

A) it is more complicated to explain to the public than inflation targeting and thus the public might be confused about the objectives of the central bank. 
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 is more complicated to explain to the public than inflation targeting and thus the public might be confused about the objectives of the central bank. 
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 9

Approaches to establishing central bank credibility include

Accepted Answer

A) inflation targeting. 
B) nominal GDP targeting. 
C) central bank independence. 
D) appointment of a more conservative central banker. 
E) all of the above. 
A) inflation targeting. 
B) nominal GDP targeting. 
C) central bank independence. 
D) appointment of a more conservative central banker. 
E) all of the above.

Question 10

Ending the "Great Inflation" era in the 1970s is an example of

Accepted Answer

A) inflation targeting. 
B) exchange rate targeting. 
C) central bank independence. 
D) appointment of a more conservative central banker. 
E) all of the above. 
A) inflation targeting. 
B) exchange rate targeting. 
C) central bank independence. 
D) appointment of a more conservative central banker. 
E) all of the above.

Question 11

Suppose that there is a negative aggregate supply shock and the central bank commits to an inflation rate target.

Accepted Answer

A) If the commitment is credible,the public's expected inflation will remain unchanged. 
B) Credible policy produces better outcomes on both inflation and output in the short run. 
C) Policies that are not credible produce worse economic contraction. 
D) all of the above. 
E) both A and C. 
A) If the commitment is credible,the public's expected inflation will remain unchanged. 
B) Credible policy produces better outcomes on both inflation and output in the short run. 
C) Policies that are not credible produce worse economic contraction. 
D) all of the above. 
E) both A and C.

Exam 29: The Role of Expectations in Monetary Policy

A credible nominal anchor

Potential weaknesses of nominal GDP targeting include

According to the Lucas critique,if past increases in the short-term interest rate have always been temporary,then

The Lucas critique indicates that

Approaches to establishing central bank credibility include

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

The interest rate thought to have the most important impact on aggregate demand is the

Potential weaknesses of nominal GDP targeting include

Approaches to establishing central bank credibility include

Ending the "Great Inflation" era in the 1970s is an example of

Suppose that there is a negative aggregate supply shock and the central bank commits to an inflation rate target.

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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