Question 1

Why have economists abandoned the use of money-growth rules in the United States?

Accepted Answer

A) Because the Fed can no longer control the money supply 
B) Because the velocity growth rate has been too stable 
C) Because of instability in money demand 
D) Because money-growth rules are overly activist 
A) Because the Fed can no longer control the money supply 
B) Because the velocity growth rate has been too stable 
C) Because of instability in money demand 
D) Because money-growth rules are overly activist C

Question 2

The systematic setting of policy according to a formula is known as

Accepted Answer

A) credibility. 
B) an expectations trap. 
C) discretionary policy. 
D) a rule for monetary policy. 
A) credibility. 
B) an expectations trap. 
C) discretionary policy. 
D) a rule for monetary policy. D

Question 3

The Taylor rule implies that the nominal federal funds rate should be increased if there is a_____ output gap or a_____ inflation gap.?

Accepted Answer

A) ?positive? positive 
B) ?positive? negative 
C) ?negative? positive 
D) ?negative? negative 
A) ?positive? positive 
B) ?positive? negative 
C) ?negative? positive 
D) ?negative? negative A

Question 4

If the Fed follows the Taylor rule and actual inflation is below the inflation target set by the Fed,

Accepted Answer

A) ​the Fed should reduce the nominal federal funds rate. 
B) ​the Fed should reduce the supply of money. 
C) ​the Fed should charge a higher tax rate. 
D) ​the Fed should spend lesser money. 
A) ​the Fed should reduce the nominal federal funds rate. 
B) ​the Fed should reduce the supply of money. 
C) ​the Fed should charge a higher tax rate. 
D) ​the Fed should spend lesser money.

Question 5

If the potential output of an economy is worth $440 billion and the actual output during a particular year was $435 billion, the output gap is

Accepted Answer

A) ­​1.14 percent 
B) ​2.2 percent 
C) ​­5 percent 
D) ​1.1 percent 
A) ­​1.14 percent 
B) ​2.2 percent 
C) ​­5 percent 
D) ​1.1 percent

Question 6

The Fed eases policy when it

Accepted Answer

A) decreases both the money growth and the federal funds rate. 
B) decreases the money growth and increases the federal funds rate. 
C) increases both the money growth and the federal funds rate. 
D) increases the money growth and decreases the federal funds rate. 
A) decreases both the money growth and the federal funds rate. 
B) decreases the money growth and increases the federal funds rate. 
C) increases both the money growth and the federal funds rate. 
D) increases the money growth and decreases the federal funds rate.

Question 7

The central bank of a country follows the Taylor rule to set its interest rate.If the equilibrium real interest rate rises by 1 percentage point, all other variables remaining unchanged,​

Accepted Answer

A) the central bank should raise the nominal interest rate by 1 percentage point. 
B) the central bank should lower the nominal interest rate by 1 percentage point. 
C) the central bank should raise the nominal interest rate by 0.5 percentage points. 
D) the central bank should lower the nominal interest rate by 0.5 percentage points. 
A) the central bank should raise the nominal interest rate by 1 percentage point. 
B) the central bank should lower the nominal interest rate by 1 percentage point. 
C) the central bank should raise the nominal interest rate by 0.5 percentage points. 
D) the central bank should lower the nominal interest rate by 0.5 percentage points.

Question 8

People know that the Fed has the incentive to announce that the inflation rate will be 3 percent next year, so people will build 3 percent inflation into their wage negotiations.But then the Fed has the incentive to increase inflation above 3 percent to make the economy grow faster.This type of phenomenon is known as

Accepted Answer

A) inflation targeting. 
B) time inconsistency. 
C) McCallum's rule. 
D) an expectations trap. 
A) inflation targeting. 
B) time inconsistency. 
C) McCallum's rule. 
D) an expectations trap.

Question 9

Why do monetarists favor the use of a nonactivist rule for monetary policy?

Accepted Answer

Monetarists favor the use of a nonactivi

Question 10

What causes the formation of an expectations trap and how can the Fed prevent one from forming?

Accepted Answer

In an expectations trap, people form exp

Question 11

Taylor originally picked _____as the weight on the output gap and _____as the weight on the inflation gap in his rule.

Accepted Answer

A) 1; 1 
B) 1; 1/2 
C) 1/2; 1/2 
D) 1/2; 1 
A) 1; 1 
B) 1; 1/2 
C) 1/2; 1/2 
D) 1/2; 1

Question 12

Which equation best represents the Taylor rule?

Accepted Answer

A) i = r* + ?T + {w1 × [(Y ? Y*)/Y*] × 100} + [w2 × (? ? ?T)] 
B) i = r* + ? + {w1 × [(Y ? Y*)/Y*] × 100} + [w2 × (? ? ?T)] 
C) i = r + ?T + {w1 × [(Y ? Y*)/Y*] × 100} + [w2 × (? ? ?T)] 
D) i = r + ? + {w1 × [(Y ? Y*)/Y*] × 100} + (w2 × ?) 
A) i = r* + ?T + {w1 × [(Y ? Y*)/Y*] × 100} + [w2 × (? ? ?T)] 
B) i = r* + ? + {w1 × [(Y ? Y*)/Y*] × 100} + [w2 × (? ? ?T)] 
C) i = r + ?T + {w1 × [(Y ? Y*)/Y*] × 100} + [w2 × (? ? ?T)] 
D) i = r + ? + {w1 × [(Y ? Y*)/Y*] × 100} + (w2 × ?)

Question 13

Suppose the economy is thought to be 5 percent below potential (i.e., the output gap is −5 percent), when potential output grows 3 percent per year.Suppose the Fed is following the Taylor rule, with an inflation rate of 6 percent over the past year.The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 0.5 each.The inflation target is 1 percent.What should the federal funds rate be?

Accepted Answer

A) 4 percent 
B) 6 percent 
C) 8 percent 
D) 9 percent 
A) 4 percent 
B) 6 percent 
C) 8 percent 
D) 9 percent

Question 14

If the growth rate of the money supply is 4 percent, the growth rate of velocity of money is 1 percent, and real output growth is 2 percent, what is the inflation rate?

Accepted Answer

A) −3 percent 
B) −1 percent 
C) +1 percent 
D) +3 percent 
A) −3 percent 
B) −1 percent 
C) +1 percent 
D) +3 percent

Question 15

Which of the following best describes the reason why policymakers do not generally like to commit to following a rule for monetary policy?

Accepted Answer

A) Because changes to the economy's structure will prevent any rule from working well for long 
B) Because rules do not effectively prevent time-inconsistency 
C) Because rules without credibility are worse than discretion 
D) Because central bankers like to feel important 
A) Because changes to the economy's structure will prevent any rule from working well for long 
B) Because rules do not effectively prevent time-inconsistency 
C) Because rules without credibility are worse than discretion 
D) Because central bankers like to feel important

Question 16

Why does the Taylor rule have such wide appeal?

Accepted Answer

The Taylor rule is appealing because it

Question 17

A benefit to policymakers of following rules rather than discretion is

Accepted Answer

A) they could employ a larger staff of economists. 
B) they will contribute to the formation of an expectations trap. 
C) they would not be able to pursue time-inconsistent policies. 
D) they would gain flexibility in case the economy's structure changed. 
A) they could employ a larger staff of economists. 
B) they will contribute to the formation of an expectations trap. 
C) they would not be able to pursue time-inconsistent policies. 
D) they would gain flexibility in case the economy's structure changed.

Question 18

Which terms in the equation for Taylor rule can be influenced by the government through monetary policy?

Accepted Answer

A) Inflation gap and interest-rate spread 
B) Unemployment gap and interest-rate spread 
C) Interest-rate spread and unemployment gap 
D) Output gap and inflation gap 
A) Inflation gap and interest-rate spread 
B) Unemployment gap and interest-rate spread 
C) Interest-rate spread and unemployment gap 
D) Output gap and inflation gap

Question 19

The Fed is said to tighten policy when it

Accepted Answer

A) decreases both the money growth and the federal funds rate. 
B) decreases the money growth and increases the federal funds rate. 
C) increases both the money growth and the federal funds rate. 
D) increases the money growth and decreases the federal funds rate. 
A) decreases both the money growth and the federal funds rate. 
B) decreases the money growth and increases the federal funds rate. 
C) increases both the money growth and the federal funds rate. 
D) increases the money growth and decreases the federal funds rate.

Question 20

Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a tight monetary policy?​

Accepted Answer

A) The economy will enter into a recession. 
B) ​The level of economic activity will increase. 
C) The actual inflation rate will rise. 
D) The federal funds rate will fall. 
A) The economy will enter into a recession. 
B) ​The level of economic activity will increase. 
C) The actual inflation rate will rise. 
D) The federal funds rate will fall.

Why have economists abandoned the use of money-growth rules in the United States?

The systematic setting of policy according to a formula is known as

The Taylor rule implies that the nominal federal funds rate should be increased if there is a_ output gap or a_ inflation gap.?

If the Fed follows the Taylor rule and actual inflation is below the inflation target set by the Fed,

If the potential output of an economy is worth $440 billion and the actual output during a particular year was $435 billion, the output gap is

The Fed eases policy when it

The central bank of a country follows the Taylor rule to set its interest rate.If the equilibrium real interest rate rises by 1 percentage point, all other variables remaining unchanged,

Why do monetarists favor the use of a nonactivist rule for monetary policy?

What causes the formation of an expectations trap and how can the Fed prevent one from forming?

Taylor originally picked _as the weight on the output gap and _as the weight on the inflation gap in his rule.

Which equation best represents the Taylor rule?

If the growth rate of the money supply is 4 percent, the growth rate of velocity of money is 1 percent, and real output growth is 2 percent, what is the inflation rate?

Which of the following best describes the reason why policymakers do not generally like to commit to following a rule for monetary policy?

Why does the Taylor rule have such wide appeal?

A benefit to policymakers of following rules rather than discretion is

Which terms in the equation for Taylor rule can be influenced by the government through monetary policy?

The Fed is said to tighten policy when it

Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a tight monetary policy?

Money and the Financial System

The Financial System and the Economy

Money and Payments

Present Value

The Structure of Interest Rates

Real Interest Rates

Stocks and Other Assets

How Banks Work

Governments Role in Banking

Economics Growth and Business Cycles

Modeling Money

The Aggregate-Demandaggregate-Supply Model

Modern Macroeconomic Models

Economic Interdependence

The Federal Reserve System

Monetary Control

Monetary Policy: Goals and Tradeoffs

Filters

Exam 18: Rules for Monetary Policy

Why have economists abandoned the use of money-growth rules in the United States?

The systematic setting of policy according to a formula is known as

The Taylor rule implies that the nominal federal funds rate should be increased if there is a_____ output gap or a_____ inflation gap.?

If the Fed follows the Taylor rule and actual inflation is below the inflation target set by the Fed,

If the potential output of an economy is worth $440 billion and the actual output during a particular year was $435 billion, the output gap is

The Fed eases policy when it

The central bank of a country follows the Taylor rule to set its interest rate.If the equilibrium real interest rate rises by 1 percentage point, all other variables remaining unchanged,​

Why do monetarists favor the use of a nonactivist rule for monetary policy?

What causes the formation of an expectations trap and how can the Fed prevent one from forming?

Taylor originally picked _____as the weight on the output gap and _____as the weight on the inflation gap in his rule.

Which equation best represents the Taylor rule?

If the growth rate of the money supply is 4 percent, the growth rate of velocity of money is 1 percent, and real output growth is 2 percent, what is the inflation rate?

Which of the following best describes the reason why policymakers do not generally like to commit to following a rule for monetary policy?

Why does the Taylor rule have such wide appeal?

A benefit to policymakers of following rules rather than discretion is

Which terms in the equation for Taylor rule can be influenced by the government through monetary policy?

The Fed is said to tighten policy when it

Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a tight monetary policy?​

Money and the Financial System

The Financial System and the Economy

Money and Payments

Present Value

The Structure of Interest Rates

Real Interest Rates

Stocks and Other Assets

How Banks Work

Governments Role in Banking

Economics Growth and Business Cycles

Modeling Money

The Aggregate-Demandaggregate-Supply Model

Modern Macroeconomic Models

Economic Interdependence

The Federal Reserve System

Monetary Control

Monetary Policy: Goals and Tradeoffs

Filters

The Taylor rule implies that the nominal federal funds rate should be increased if there is a_ output gap or a_ inflation gap.?

The central bank of a country follows the Taylor rule to set its interest rate.If the equilibrium real interest rate rises by 1 percentage point, all other variables remaining unchanged,

Taylor originally picked _as the weight on the output gap and _as the weight on the inflation gap in his rule.

Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a tight monetary policy?