Deck 18: Money, Inflation, and Banking: A Deeper Look

Question 1

A)W.Phillips' study of unemployment and inflation in the U.K.specifically looked at the empirical relationship between the unemployment rate and the

A) rate of change in prices.
B) rate of change in nominal wages.
C) rate of change in real wages.
D) level of nominal wages.
E) aggregate output

Answer 1

rate of change in nominal wages.

Question 2

According to the Friedman-Lucas money surprise model,we should expect a stable relationship between

A) the inflation rate and the level of real output.
B) the inflation rate and deviations of real output from trend.
C) deviations in the inflation rate from what it is expected to be and the level of real output from trend.
D) deviations in the inflation rate from what it is expected to be and deviations in real output from trend.
E) the inflation rate and the level of real output over the long periods of time only.

Answer 2

deviations in the inflation rate from what it is expected to be and deviations in real output from trend.

Question 3

There is a

A) positive correlation between the rate of change in nominal wages and the rate of change in other money prices.
B) positive correlation between the unemployment rate and the deviation of aggregate economic activity from trend.
C) positive correlation between interest rates and the level of aggregate economic activity.
D) negative correlation between aggregate economic activity and the inflation rate.
E) positive correlation between the rate of change in nominal wages and the unemployment rate.

Answer 3

positive correlation between the rate of change in nominal wages and the rate of change in other money prices.

Question 4

There is a

A) negative correlation between the rate of change in nominal wages and the rate of change in other money prices.
B) positive correlation between the unemployment rate and the deviation of aggregate economic activity from trend.
C) negative correlation between the unemployment rate and the deviation of aggregate economic activity from trend.
D) negative correlation between aggregate economic activity and the inflation rate.
E) negative correlation between the rate of change in nominal wages and the unemployment rate.

Question 5

According to the Friedman-Lucas money surprise model,a surprise change in the money supply will imply a

A) decrease in the growth rate of money wages.
B) surprise increase in the inflation rate.
C) surprise decrease in government spending.
D) surprise decrease in the interest rate.
E) decrease in labour supply below trend.

Question 6

Economic costs of inflation include

A) lower interest rates.
B) the public holding a low aggregate stock of real money balances.
C) a deterioration of the trade balance.
D) an appreciation of the domestic exchange rate.
E) strong aggregate output coupled with higher rates of employment.

Question 7

When the Friedman-Lucas money surprise model is incorporated into the Phillips curve,

A) when the inflation rate is greater than the expected inflation rate, output is equal to trend output.
B) when the inflation rate is less than the expected inflation rate, output is greater than trend output.
C) when the inflation rate is equal to the expected inflation rate, then output is equal to trend output.
D) when the inflation rate is rising, then output is below trend output.
E) when the expected inflation rate rises, output falls.

Question 8

The Phillips curve relationship in the Canadian data began to disintegrate in the

A) 1930s.
B) 1940s.
C) 1950s.
D) 1960s.
E) 1980s.

Question 9

The Phillips curve describes the

A) negative relationship between the inflation rate and real aggregate economic activity.
B) negative relationship between the inflation rate and the unemployment rate.
C) negative relationship between the inflation rate and real wage rate.
D) positive relationship between the inflation rate and real aggregate economic activity.
E) positive relationship between the inflation rate and the unemployment rate.

Question 10

In the central bank commitment story,high inflation in Canada during the 1970s was caused by

A) lower interest rates.
B) a deterioration of the trade balance.
C) an appreciation of the domestic exchange rate.
D) the inability of the Bank of Canada to commit to not using surprise inflation to increase output in the short run.
E) a commitment on the part of the federal government to reduce government spending.

Question 11

A Phillips curve relationship best fits the Canadian data in the

A) 1930s.
B) 1940s.
C) 1950s.
D) 1960s.
E) 1980s.

Question 12

The existence of large government budget deficits

A) offers the most convincing explanation of both moderate inflations and hyperinflations.
B) offers a convincing explanation for moderate inflations, but is less successful in explaining hyperinflations.
C) offers a convincing explanation for hyperinflations, but is less successful in explaining moderate inflations.
D) is rarely an important factor in either moderate inflations or hyperinflations.
E) is rarely an important factor in explaining any types of inflation.

Question 13

Deviation of GDP from trend appear to be

A) positively related to the inflation rate over short periods of time.
B) positively related to the behaviour of the inflation rate over long periods of time.
C) negatively related to the inflation rate over short periods of time.
D) negatively related to the behaviour of the inflation rate over long periods of time.
E) unrelated to the behaviour of the inflation rate over long periods of time.

Question 14

Of the following five decades,there was a Phillips curve with a less favourable trade-off in the

A) 1960s.
B) 1960s and 1970s.
C) 1980s.
D) 1980s and 1990s.
E) 2000s.

Question 15

According to the Friedman-Lucas money surprise model,there is a positive relationship between the deviation of the inflation rate from what it is expected to be,and the

A) level of government spending.
B) the value of the domestic exchange rate.
C) level of interest rates.
D) deviation of real output from trend.
E) level of consumer spending.

Question 16

Recently,inflation in Canada has been

A) of substantial public concern in Canada.
B) of the magnitude experienced by Austria in 1921-1922.
C) of the magnitude experienced by Argentina in 1989-1990.
D) not as large an issue as interest rates are.
E) of little public concern.

Question 17

Which of the following models helps to explain the Phillips curve?

A) monetary intertemporal model
B) Keynesian sticky wage model
C) efficiency wage model.
D) Friedman-Lucas money-surprise model.
E) Solow residual model.

Question 18

All historical periods of hyperinflation can be traced back to

A) irresponsible multinational corporations.
B) the existence of large government budget deficits.
C) irresponsible monetary policy.
D) an appreciation of the domestic exchange rate.
E) lower rates of government spending.

Question 19

Of the following five decades,the observed Canadian Phillips curve was steepest in the

A) 1960s.
B) 1990s.
C) 1980s.
D) 1970s.
E) 2000s.

Question 20

Recently,inflation in Canada has been

A) very volatile and is of significant public concern.
B) rising, and is of significant public concern.
C) rising, but is off little public concern.
D) constant, yet still of significant public concern.
E) quite low, and of little public concern.

Question 21

The Governor of the Bank of Canada

A) can be fired by the Prime Minister for failing to meet inflation targets.
B) cannot be fired by the Prime Minister for failing to meet inflation targets.
C) can be fired by the Bank of Canada by the Prime Minister for failing to meet inflation targets.
D) cannot be fired by the Bank of Canada by the Prime Minister for failing to meet inflation targets.
E) is responsible to the Prime Minister for meeting inflation targets.

Question 22

The original work on the application of the time inconsistency problem in macroeconomics is due to

A) Milton Friedman and Robert Lucas.
B) Michael Hutchinson and Carl Walsh.
C) Finn Kydland and Edward Prescott
D) Robert Barro and Donald Gordon.
E) Milton Friedman and anna Schwartz

Question 23

According to the Central Bank Learning Story,if the central bank tries to permanently increase real output above its original trend it will

A) succeed in its real output goal, but at the cost of a constant, permanently higher rate of inflation.
B) succeed in its real output goal, but at the cost of a permanently accelerating rate of inflation.
C) fail in its real output goal, but will not increase the rate of inflation.
D) fail in its real output goal and increase the equilibrium rate of inflation.
E) fail in its real output goal and achieve permanently higher rates of inflation.

Question 24

The Central Bank Commitment Story is most closely associated with

A) Jevons.
B) Friedman and Schwartz.
C) Diamond and Dybvig.
D) Kydland and Prescott.
E) Kiyotaki and Wright.

Question 25

Which of the following countries has the most explicit objectives and penalties for its central bank?

A) Canada
B) England
C) New Zealand
D) United States
E) Hong Kong

Question 26

According to the Bank of Canada,

A) less aggregate output is preferred to more.
B) low unemployment is preferred to higher unemployment.
C) preferences over inflation depend on the real interest rate.
D) low real interest is preferred to high real interest rates.
E) slow money wage growth is preferred to faster.

Question 27

The idea that economic agents do not make systematic errors because they use all information efficiently is called the

A) consistency hypothesis.
B) rational expectations hypothesis.
C) information efficiency hypothesis.
D) principle of maximizing behavior.
E) adaptive expectation hypothesis.

Question 28

According to the Central Bank Learning Story,a central bank behaving optimally will

A) choose the point where its indifference curve is just tanget to the Phillips curve.
B) ignore the Phillips Curve relationship.
C) choose the highest indifference curve that is still on the consumer's budget line.
D) only exploit the Phillips Curve in the long-run.
E) choose the point where its indifference curves are just tanget to the consumer's.

Question 29

According to the Friedman-Lucas money surprise model,when the inflation rate is equal to the expected inflation rate,then

A) interest rates fall.
B) the value of the domestic exchange rate rises.
C) output is equal to trend output.
D) interest rates rise.
E) the trade balance improves.

Question 30

In the Central Bank Learning Story,if i < i*,the central bank is happier if

A) inflation falls and output increases.
B) inflation increases and output falls.
C) inflation falls and output falls.
D) inflation is constant and output increases.
E) inflation increases and output increases.

Question 31

The Central Bank Commitment Story is based upon an incentive problem due to

A) time inconsistency.
B) adverse selection.
C) moral hazard.
D) externalities.
E) market failures.

Question 32

Rational expectations hypothesis deals with economic agents who

A) use past trends and behaviour to predict future trends and behaviour.
B) do not make systematic errors because they use all information efficiently.
C) attempt to maximize profits by considering their pricing and output decisions.
D) are concerned about minimizing costs and losses in order to remain competitive in the short run.
E) can correctly predict government policy and stock market fluctuations.

Question 33

The Reserve Bank of New Zealand Act is unusual in that it only specifies

A) inflation as a policy objective and because it empowers the legislature to remove the central bank governor if the objectives are not met.
B) inflation as a policy objective and because it empowers the prime minister to remove the central bank governor if the objectives are not met.
C) real output as a policy objective and because it empowers the legislature to remove the central bank governor if the objectives are not met.
D) real output as a policy objective and because it empowers the prime minister to remove the central bank governor if the objectives are not met.
E) money supply targeting as a policy objective and because it empowers the prime minister to remove the central bank governor if the objectives are not met.

Question 34

Which of the following is an example of the time consistency problem?

A) a teacher not having the incentive to give the final exam
B) consuming more in retirement than when younger
C) a teacher not having the incentive to promise a final exam
D) students not having the incentive to take the final exam
E) a teacher and the students do not have the incentive to promise a final exam

Question 35

According to the Friedman-Lucas money surprise model,we should expect a stable relationship between deviations in the inflation rate from

A) trend and deviations of real output from trend.
B) trend and deviations in real output from what it is expected to be.
C) what it is expected to be and deviations of real output from trend.
D) what it is expected to be and deviations in real output from what it is expected to be.
E) trend and deviation of real output from trend over long periods of time only.

Question 36

According to the Central Bank Learning Story,the central bank

A) always prefers lower inflation and higher output.
B) always prefers lower inflation and sometimes prefers higher output.
C) sometimes prefers lower inflation and always prefers higher output.
D) sometimes prefers lower inflation and sometimes prefers higher output.
E) always prefers lower inflation and lower output.

Question 37

According to the Central Bank Learning Story,if the central bank believes that the Phillips curve relationship is stable,it will choose a point at which real output will be

A) below trend and inflation will be lower than expected inflation.
B) below trend and inflation will be higher than expected inflation.
C) above trend and inflation will be lower than expected inflation.
D) above trend and inflation will be higher than expected inflation.
E) above trend and inflation will be at expected inflation.

Question 38

Application of the Central Bank Learning Story to the Canadian economy in the later part of the 20th century suggests that the Bank of Canada began to understand that increases in expected inflation shift the Phillips curve upward

A) in the early 1960s.
B) in the early 1970s.
C) in the early 1980s.
D) in the early 1990s.
E) even now, the Bank of Canada appears not to have learned this lesson.

Question 39

According to the Friedman-Lucas money surprise model,a stable Phillips curve relationship is most likely in periods of

A) relatively low variations in real output from trend.
B) relatively constant expected inflation.
C) relatively stagnant periods of economic growth.
D) accelerating inflation.
E) relatively low variations in the unemployment rate.

Question 40

In the Central Bank Learning Story,if i > i*,the central bank is happier if

A) inflation falls and output increases.
B) inflation increases and output falls.
C) inflation falls and output falls.
D) inflation increases and output increases.
E) inflation is constant and output increases.

Question 41

According to the Central Bank Commitment Story,

A) central banks need to be given wide latitude in using their discretion.
B) central bank discretion is dangerous.
C) central banks need to be isolated from political considerations.
D) central banks should be responsible to the executive, as opposed to the legislative branch of government.
E) central banks need to be isolated from financial market pressures.

Question 42

The run up in Canadian inflation in the 1970s and the subsequent decline in Canadian inflation in the 1980s and 1990s is

A) explained equally well by the Central Bank Learning Story and the Central Bank Commitment Story.
B) well explained by the Central Bank Learning Story, but not well explained by the Central Bank Commitment Story.
C) well explained by the Central Bank Commitment Story, but not well explained by the Central Bank Learning Story.
D) not well explained by either the Central Bank Learning Story or the Central Bank Commitment Story.
E) well explained by the Central Bank Learning Story for the 1970s and the Central Bank Commitment Story for the 1980s and 1990s.

Question 43

Control of inflation by means of a currency board has

A) worked quite well both in Argentina and Hong Kong.
B) worked well in Hong Kong, but had to be abandoned by Argentina in 2002.
C) worked well in Argentina, but had to be abandoned by Hong Kong in 1999.
D) failed in Argentina in 1999 and failed in Hong Kong in 2002.
E) rapid concerns about the viability of inflation targeting over targeting monetary aggregates.

Question 44

In Hong Kong,the commitment mechanism that was implemented dealt with

A) lowering interest rates by implementing expansionary monetary policy.
B) appreciating its domestic currency by lowering interest rates.
C) improving its trade balance by raising the value of its domestic currency.
D) targeting the unemployment rate problem by expanding government spending.
E) reducing inflation by implementing a fixed exchange rate enforced by a currency board.

Question 45

Current monetary arrangements in Hong Kong are centered on

A) a central bank with considerable discretion in combating business cycle fluctuations.
B) explicit targets for growth rates of the monetary aggregates.
C) a pure currency board with no discretion.
D) a currency board without legally binding future commitments.
E) explicit inflation targets.

Question 46

Application of the time inconsistency problem to monetary policy suggests that,without some mechanism to ensure commitment,the

A) rate of inflation will be higher than it would be with commitment.
B) level of real output will be lower than it would be with commitment.
C) rate of inflation will be higher and the level of real output will be lower than it would be with commitment.
D) rate of inflation and the level of real output will be higher than it would be with commitment.
E) the rate of inflation will be higher and the level of real output would be indeterminant than it would be with commitment.

Question 47

To prevent the Bank of Canada from using discretion is to impose some rule to govern monetary policy such as

A) real interest rate targeting.
B) inflation targeting.
C) money supply targeting.
D) unemployment targeting.
E) aggregate output targeting.

Question 48

What are two observations about empirical Phillips curve relations in Canada?

Question 49

For recent Canadian inflation history,the central central bank commitment story dealt with

A) the federal government committed to lowering taxes and increasing government spending.
B) the inability of the central bank to maintain low interest rates.
C) high inflation due to the inability of the central bank to commit to a policy of not generating surprise inflation.
D) the central bank not being convinced that there was a Phillips curve.
E) the central bank not concerned about the economic welfare of private citizens.

Question 50

Milton Friedman suggested that a solution to the lack of commitment problem as it related to monetary policy,should be

A) interest rate targeting.
B) money growth rate targeting.
C) inflation targeting.
D) aggregate output targeting.
E) employment targeting.

Question 51

The Canadian inflation experience from 1960-2002

A) can be explained equally plausibly by the Central Bank Learning Story and the Central Bank Commitment Story.
B) can be explained by the Central Bank Learning Story, but not the Central Bank Commitment Story.
C) can be explained by the Central Bank Commitment Story, but not the Central Bank Learning Story.
D) cannot be explained by either the Central Bank Learning Story or the Central Bank Commitment Story.
E) can be explained by the Central Bank Learning Story for the first half of the period and the Central Bank Learning Story in the second half of the period.