Deck 13: Stabilization Policy and the Asad Framework

Question 1

If
Is close to zero,

A)the AD curve is vertical.
B)the AD curve is relatively flat.
C)the AD curve is horizontal.
D)the AD curve is relatively steep.
E)Not enough information is given.

Answer 1

D

Question 2

Consider Figure 13.2.The aggregate demand curve __________ displays a relatively aggressive monetary policy,while the curve __________ displays a monetary policy completely unresponsive to changes in inflation.

A)
B)
C)
D)
E)none of the above

Answer 2

B

Question 3

Combining the IS and monetary policy rule curves gives us:

A)Okun's law.
B)the Phillips curve.
C)the aggregate demand curve.
D)the MP curve.
E)current output.

Answer 3

C

Question 4

Consider the monetary rule
)If the inflation rate is 4 percent,the marginal product of capital is 2 percent,and the target rate of inflation is 3 percent,then the real interest rate should be:

A)3.50 percent.
B)3.25 percent.
C)2.25 percent.
D)1.75 percent.
E)2.50 percent.

Question 5

The simple monetary policy rule discussed at length in the text is:

A) .
B) .
C) .
D) .
E) .

Question 6

If
Is close to zero,

A)monetary policy is relatively aggressive and the AD curve is relatively flat.
B)monetary policy is relatively permissive and the AD curve is relatively steep.
C)monetary policy is relatively aggressive and the AD curve is relatively steep.
D)monetary policy is relatively permissive and the AD curve is relatively flat.
E)monetary policy is relatively permissive and the AD curve is vertical.

Question 7

If
In the simple monetary rule and the inflation rate is 2 percent below the target inflation rate,the Federal Reserve will:

A)lower the target rate by 2 percent.
B)raise the interest rate by 1 percent.
C)lower the interest rate by 1 percent.
D)lower the marginal product of capital by 1 percent.
E)Not enough information is given.

Question 8

In the simple monetary policy rule
,
Represents:

A)the marginal product of capital.
B)how sensitive monetary policy is to changes in inflation.
C)the deviation of the inflation rate from the target rate.
D)the target rate of inflation.
E)none of the above

Question 9

A policy rule that dictates monetary policy is:

A)written down.
B)at the discretion of the president.
C)at the discretion of the chairman of the Federal Reserve.
D)independent of the state of the economy.
E)a function of the state of the economy.

Question 10

The aggregate demand curve is given by:

A) .
B) .
C) .
D) .
E) .

Question 11

If
Is relatively high,

A)monetary policy is relatively permissive and the AD curve is relatively flat.
B)monetary policy is relatively aggressive and the AD curve is relatively steep.
C)monetary policy is relatively aggressive and the AD curve is relatively flat.
D)monetary policy is relatively permissive and the AD curve is relatively steep.
E)monetary policy is relatively permissive and the AD curve is vertical.

Question 12

The simple monetary policy rule
Implies that:

A)if ,the Federal Reserve should lower the interest rate.
B)if ,the Federal Reserve should raise the interest rate.
C)if ,the Federal Reserve should not change the interest rate.
D)all of the above
E)if ,the interest rate is zero.

Question 13

A monetary policy rule may contain which of the following?

A)short-term output
B)the inflation rate
C)the unemployment rate
D)all of the above
E)none of the above

Question 14

The monetary policy rule "dictates":

A)the optimal rate of inflation.
B)the choice of federal funds rate.
C)the marginal product of capital.
D)the natural rate of unemployment.
E)none of the above

Question 15

If
Equals zero,

A)the AD curve is horizontal.
B)the AD curve is relatively steep.
C)the AD curve is relatively flat.
D)the AD curve is vertical.
E)Not enough information is given.

Question 16

When we raise the federal funds rate by 2 percent for every 1 percent increase in the inflation rate,this is an example of:

A)a fiscal policy rule.
B)a monetary policy rule.
C)discretionary monetary policy.
D)discretionary fiscal policy.
E)none of the above

Question 17

In the simple monetary policy rule
,
Measures:

A)the marginal product of capital.
B)the deviation of the inflation rate from the target rate.
C)how sensitive monetary policy is to changes in inflation.
D)the target rate of inflation.
E)none of the above

Question 18

Which of the following best describes movement along the AD curve?

A)A change in the inflation rate causes the central bank to change interest rates,thereby causing a corresponding proportional change in investment.
B)A sudden increase in the tax rate.
C)A change in monetary policy.
D)A change in the inflation rate causes the federal government to reduce discretionary spending.
E)A change in unemployment causes the federal government to reduce discretionary spending.

Question 19

Consider Figure 13.2.Each of the aggregate demand curves pictured represents a different economy.In which economy would fighting inflation have the biggest impact on real output?

A)Economy 3
B)Economy 1
C)Economy 2
D)Economy 4
E)Not enough information is given.

Question 20

A monetary policy rule may contain which of the following?

A)price shocks
B)short-term output
C)the unemployment rate
D)the inflation rate
E)all of the above

Question 21

A change in which of the following parameters shifts the AD curve
?

A)
B)
C)
D)
E)a and b

Question 22

Consider Figure 13.3.If rebels in Nigeria,a major oilproducing country,temporarily hijack privately owned and operated oil wells,this would be characterized in the aggregate supply curve as a movement from point __________ to point __________.

A)c;b
B)c;e
C)c;d
D)b;e
E)Not enough information is given.

Question 23

Consider Figure 13.2.Each of the aggregate demand curves pictured represents a different economy.In which economy is the central bank most concerned with inflation?

A)Economy 4
B)Economy 1
C)Economy 3
D)Economy 2
E)Not enough information is given.

Question 24

In the short-run model,the steady state is characterized by:

A) .
B) .
C) .
D)all of the above
E)none of the above

Question 25

Consider Figure 13.2.Each of the aggregate demand curves pictured represents a different economy.Which of the four economies' central banks would be most concerned with unemployment rather than inflation?

A)Economy 2
B)Economy 4
C)Economy 3
D)Economy 1
E)Not enough information is given.

Question 26

On the aggregate supply curve,when short-run output deviations are equal to zero,the y-intercept is equal to:

A) .
B) .
C) .
D)0.
E) .

Question 27

A change in which of the following parameters shifts the AD curve
?

A)
B)
C)
D)
E)a and b

Question 28

Which of the following is the aggregate supply curve?

A)
B)
C)
D)
E)none of the above

Question 29

In the short-run model,the steady state is characterized by:

A) .
B) .
C) .
D)all of the above
E)none of the above

Question 30

On the aggregate supply curve,an increase in inflation causes __________,while a price shock causes __________.

A)an upward movement along the curve;the curve to shift
B)downward movement along the curve;the curve to shift
C)the curve to shift;movement along the curve
D)downward movement along the curve;upward movement along the curve
E)Not enough information is given.

Question 31

Which of the following shifts the aggregate supply curve?

A)a change in u¯
B)an increase in the price of oil
C)the current inflation rate
D)all of the above
E)raising the federal funds rate

Question 32

Use the aggregate supply/aggregate demand model in Figure 13.4 to answer the following scenario.Nigerian rebels taking over privately owned oil wells would cause the economy to initially move from point __________ to point __________;eventually the economy would return to the steady state at point __________.

A)c;a;b
B)c;d;a
C)a;d;a
D)b;a;c
E)Not enough information is given.

Question 33

Which of the following best describes why the aggregate supply curve slopes upward?

A)When actual output exceeds potential,firms struggle to keep production in line with the high demand.Firms therefore raise their prices by more than the usual amount in an attempt to cover increased production costs.
B)When actual output exceeds potential,firms have an easy time keeping production in line with the high demand.Firms therefore lower their prices by more than the usual amount in an attempt to cover increased production costs.
C)When actual output exceeds potential,firms struggle to keep production in line with the high demand.Firms therefore lower their prices with decreased production costs.
D)When actual output falls below potential,firms easily keep production in line with the high demand.Firms therefore raise their prices by more than the usual amount in an attempt to cover increased production costs.
E)None of the above is correct.

Question 34

Which of the following best describes why the aggregate demand curve slopes downward?

A)If the central bank observes a high rate of inflation,the monetary policy rule dictates an increase in the real interest rate.The high interest rate reduces output by reducing investment demand in the economy.
B)If the central bank observes a low rate of inflation,the monetary policy rule dictates an increase in the real interest rate.The high interest rate reduces output by reducing investment demand in the economy.
C)If the central bank observes a high rate of inflation,the monetary policy rule dictates a decrease in the real interest rate.The low interest rate increases output by reducing investment demand in the economy.
D)If the central bank observes a low rate of inflation,the monetary policy rule dictates a decrease in the real interest rate.The low interest rate reduces output by reducing investment demand in the economy.
E)None of the above is correct.

Question 35

A change in which of the following parameters would cause a movement along the AD curve
?

A)
B)
C)
D)
E)a and b

Question 36

Use the aggregate supply/aggregate demand model in Figure 13.4 to answer the following scenario.The terrorist attacks on 9/11 caused the economy initially to move from point __________ to point __________.

A)c;a
B)c;b
C)b;a
D)a;b
E)Not enough information is given.

Question 37

Which of the following shifts the aggregate supply curve?

A)an increase in the price of oil
B)a change in the previous period's inflation rate
C)higher taxes on firms
D)all of the above
E)an increase in government expenditure

Question 38

Use the aggregate supply/aggregate demand model in Figure 13.4 to answer the following scenario.Nigerian rebels taking over privately owned oil wells would cause the economy to initially move from point__________ to point __________.

A)c;b
B)b;c
C)c;a
D)b;a
E)Not enough information is given.

Question 39

Consider Figure 13.3.If there is a positive inflation shock,ceteris paribus,the economy would move from point __________ to point __________.

A)c;d
B)c;b
C)c;e
D)b;e
E)Not enough information is given.

Question 40

The aggregate supply curve is derived from:

A)Okun's law.
B)the Phillips curve.
C)the Fisher equation.
D)the monetary policy rule.
E)the interaction of the IS and MP curves.

Question 41

If the simple Taylor rule models the "ideal" federal funds rate,the __________ displayed a monetary policy that was too loose.

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

Question 42

Assuming the simple Taylor rule for dictating the federal funds rate,when the actual federal funds rate deviates from the suggested rate,it can be explained by:

A)bad monetary policy.
B)discretionary fiscal policy.
C)discretionary monetary policy.
D)poorly informed monetary policy.
E)poorly informed fiscal policy.

Question 43

The central bank often deviates from simple policy rules because:

A)the rules are always wrong.
B)they have new and more detailed information.
C)they are ordered to by the president.
D)they have no discretion.
E)the federal government is more interested in unemployment.

Question 44

During the __________,the actual federal funds rate was substantially lower than the rate suggested by the simple Taylor rule.

A)early 1960s
B)late 1990s
C)early to mid-1980s
D)early 1990s
E)None of the above is correct.

Question 45

Professor John Taylor suggested using which set of values for the Taylor rule?

A)
B)
C)
D)
E)

Question 46

The reputations of __________,__________,and __________ have convinced observers that the Fed is committed to low and stable inflation.

A)John Taylor,Milton Friedman,Karl Marx
B)George H.W.Bush,Bill Clinton,George W.Bush
C)Ronald Reagan,Alan Greenspan,Ben Bernanke
D)Paul Volcker,Alan Greenspan,Ben Bernanke
E)David Ricardo,John Stuart Mill,Alfred Marshall

Question 47

The equation used to predict the federal funds rate is called the:

A)Phillips curve.
B)monetary policy rule.
C)Taylor rule.
D)marginal product of capital.
E)Slutsky equation.

Question 48

Use the aggregate supply/aggregate demand model in Figure 13.4 to answer the following scenario.The terrorist attacks on 9/11 caused the economy initially to move from point __________ to point __________;eventually the economy returned to the steady state at point __________.

A)c;a;b
B)c;b;a
C)c;d;c
D)a;b;c
E)Not enough information is given.

Question 49

Which of the following equations,discussed in the text,can be used to predict the federal funds rate?

A)
B)
C)
D)
E)none of the above

Question 50

Which of the following equations,discussed in the text,can be used to predict the federal funds rate?

A)
B)
C)
D)
E)

Question 51

Use the aggregate supply/aggregate demand model in Figure 13.4 to answer the following scenario.The United Auto Workers were able to negotiate a contract for higher wages and better benefits.The economy initially moves from point __________ to point __________;eventually the economy returns to the steady state at point __________.

A)c;d;a
B)a;d;a
C)c;a;b
D)b;a;c
E)Not enough information is given.

Question 52

If the current rate of inflation is 4 percent,using the values suggested by Professor Taylor,
,the Taylor rule predicts a federal funds rate of:

A)1 percent.
B)4.5 percent.
C)3 percent.
D)4 percent.
E)0.5 percent.

Question 53

Since the 1990s,the country with the lowest rate of inflation has been:

A)Russia.
B)the United States.
C)the United Kingdom.
D)Japan.
E)Italy.

Question 54

Policy is conducted by discretion if policymakers:

A)size up the economy and choose whatever policy seems appropriate at the time.
B)announce in advance how policy will respond to various situations and commit themselves to following through on this announcement.
C)maintain a constant growth rate of the money supply without making their decision public.
D)announce and achieve a balanced government budget.
E)announce and maintain a constant interest rate.

Question 55

Use the aggregate supply/aggregate demand model in Figure 13.4 to answer the following scenario.In the 1990s,Japan experienced a prolonged sluggish economy.If the Bank of Japan targeted inflation,it would have responded to this situation by __________,pushing the economy from point __________ to point __________;eventually the economy would have returned to the steady state at point __________.

A)raising the inflation target rate;a;b;c
B)lowering the inflation target rate;a;b;c
C)raising the inflation target rate;a;d;c
D)lowering the inflation target rate;c;d;a
E)Not enough information is given.

Question 56

If the current rate of inflation is 1 percent,using the values suggested by Professor Taylor,
,the Taylor rule predicts a federal funds rate of:

A)0 percent.
B)1.5 percent.
C)1 percent.
D)0.5 percent.
E)3.5 percent.

Question 57

Policymakers will find it easier to achieve their goals by sticking to policy rules rather than discretion if they face the problem of:

A)very short policy lags.
B)adaptive expectations.
C)time inconsistency.
D)discretionary fiscal policy.
E)a weak central bank.

Question 58

The adjustment process back to the steady state in the short-run model hinges on the:

A)rate of unemployment.
B)immediate reaction to a change in the inflation rate.
C)consumer's response to inflation shocks.
D)government's response to inflation shocks.
E)slow adjustment of inflation reflected in the aggregate supply curve.

Question 59

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making,__________ with no economic benefit;this is called the __________ problem.

A)output rises;policy lag
B)unemployment rises;time inconsistency
C)expectations rise;adaptive expectations
D)inflation rises;time inconsistency
E)inflation rises;discretionary

Question 60

Most Fed watchers are convinced that the Fed is committed to:

A)high inflation.
B)low and volatile inflation.
C)low and stable inflation.
D)a high unemployment rate.
E)high and stable inflation.

Question 61

A sudden increase in the price of oil would cause the AS curve to shift up and to the left.

Question 62

If the monetary policy parameter
changes,it causes the AD curve to shift.

Question 63

If m = 1/2 in the simple monetary rule and if inflation rises by 2 percent,interest rates should rise by 2 percent.

Question 64

A policy rule dictates that monetary policy is at the discretion of the president.

Question 65

In the presence of rational expectations,the central banks' willingness to battle inflation:

A)causes future inflation.
B)becomes a determinant of past inflation.
C)undermines the ability to fight inflation.
D)becomes a determinant of expected inflation.
E)weakens the central government.

Question 66

In the simple monetary policy rule,if
,the AD curve is horizontal.

Question 67

In the simple monetary policy rule,a large
means that the central bank is aggressively fighting inflation.

Question 68

Combining the IS and monetary policy curves gives us the aggregate supply curve.

Question 69

Which of the following countries does not adopt an explicit inflation target?

A)Mexico
B)the United Kingdom
C)the United States
D)Brazil
E)Canada

Question 70

Consider Figure 13.5.If the Fed sets a lower inflation target,under rational expectations,the economy moves from point __________ to point __________.

A)c;a instantly
B)a;c slowly
C)c;d instantly
D)c;b slowly
E)b;a instantly

Question 71

Under rational expectations,

A)people use all the information at their disposal to make their best forecast of the coming rate of inflation.
B)people use all past rates of inflation to make their best forecast of the coming rate of inflation.
C)people use announcements by the Fed to make their best forecast of the coming rate of inflation.
D)people use only the Fed's inflation target to make their best forecast of the coming rate of inflation.
E)people use the unemployment rate to make their best forecast of the coming rate of inflation.

Question 72

Consider Figure 13.5.If the Fed sets a higher inflation target,under rational expectations,the economy moves from point __________ to point __________.

A)a;c slowly
B)a;c instantly
C)a;d instantly
D)b;d slowly
E)b;c instantly

Question 73

The fact that any model that utilizes adaptive expectations necessarily will be misspecified is called:

A)Okun's law.
B)time inconsistency.
C)the Lucas critique.
D)the Slutsky paradox.
E)monetarism.

Question 74

In the short-run model,the steady state is characterized by
and
.

Question 75

The ultimate goal of macroeconomic policy is:

A)low and stable inflation.
B)full employment,output at potential,and low,stable inflation.
C)full employment,output above potential,and low,stable inflation.
D)zero unemployment and inflation.
E)low interest rates.

Question 76

On the aggregate demand curve,if the rate of inflation rises,short-term output will rise as the curve shifts right.

Question 77

The simple monetary rule states that,if the current rate of inflation is below the inflation target,interest rates should fall.

Question 78

An increase in military spending will cause the AD curve to shift to the right.

Question 79

If the United Auto Workers successfully negotiate higher wages,this would cause the AD curve to shift to the left.

Question 80

The advantage of an explicit inflation target is that:

A)it helps anchor inflation expectations.
B)it allows banks to set interest rates.
C)it stabilizes employment.
D)it raises the marginal product of capital.
E)it completely eradicates discretionary monetary policy.