Deck 18: Six Debates Over Macroeconomic Policy

Question 1

The Fed raised interest rates in 2004 and 2005. This implies, other things the same, that the Fed

A) increased the money supply because it was concerned about unemployment.
B) increased the money supply because it was concerned about inflation.
C) decreased the money supply because it was concerned about unemployment.
D) decreased the money supply because it was concerned about inflation.

Answer 1

D

Question 2

The Fed lowered interest rates in 2007 and 2008. This implies, other things the same, that the Fed

A) increased the money supply because it was concerned about unemployment.
B) increased the money supply because it was concerned about inflation.
C) decreased the money supply because it was concerned about unemployment.
D) decreased the money supply because it was concerned about inflation.

Answer 2

A

Question 3

Those who desire that policymakers stabilize the economy would advocate which of the following when aggregate demand is insufficient to ensure full employment?

A) Decrease the money supply.
B) Decrease taxes.
C) Decrease government expenditures.
D) Do nothing and let markets correct themselves.

Answer 3

B

Question 4

The Fed lowered interest rates in 2001 and 2002. This implies, other things the same, that the Fed

A) increased the money supply because it was concerned about unemployment.
B) increased the money supply because it was concerned about inflation.
C) decreased the money supply because it was concerned about unemployment.
D) decreased the money supply because it was concerned about inflation.

Question 5

In the Summer of 2008, consumers indicated that they were less optimistic about the future of the economy. Such a change in sentiment is likely to

A) shift aggregate demand to the right.
B) increase output.
C) increase unemployment.
D) increase prices.

Question 6

If the unemployment rate rises, which policies would be appropriate to reduce it?

A) increase the money supply, increase taxes
B) increase the money supply, cut taxes
C) decrease the money supply, increase taxes
D) decrease the money supply, cut taxes

Question 7

Suppose aggregate demand fell. In order to stabilize the economy, the government might

A) increase the money supply.
B) decrease government expenditures.
C) increase taxes.
D) do nothing.

Question 8

Fluctuations in employment and output result from changes in

A) aggregate demand only.
B) aggregate supply only.
C) aggregate demand and aggregate supply.
D) neither aggregate demand nor aggregate supply.

Question 9

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. In response to this change, someone who advocated "lean against the wind" policies might advocate

A) decreasing the money supply.
B) increasing taxes.
C) increasing government expenditures.
D) decreasing government expenditures.

Question 10

President George W. Bush and congress cut taxes and raised government expenditures in 2003. According to the aggregate supply and aggregate demand model

A) both the tax cut and the increase in government expenditures would tend to increase output.
B) only the tax cut would tend to increase output.
C) only the increase in government expenditures would tend to increase output.
D) neither the tax cut nor the increase in government expenditures would tend to increase output.

Question 11

President Barrack Obama and Congress cut taxes and raised government expenditures during the recent financial crisis. According to the aggregate supply and aggregate demand model which of these policies would tend to reduce unemployment?

A) both the tax cut and the increase in government expenditures
B) the tax cut but not the increase in government expenditures
C) the increase in government expenditures but not the tax cut
D) neither the increase in government expenditures nor the tax cut

Question 12

The Federal Reserve will tend to tighten monetary policy when

A) interest rates are rising too rapidly.
B) it thinks the unemployment rate is too high.
C) the growth rate of real GDP is quite sluggish.
D) it thinks inflation is too high today, or will become too high in the future.

Question 13

If the unemployment rate rises, which policies would both be appropriate to reduce it?

A) increase taxes, increase government spending
B) increase taxes, decrease government spending
C) decrease taxes, increase government spending
D) decrease taxes, decrease government spending

Question 14

Policymakers following a "lean against the wind" policy would

A) increase government expenditures when output is low and decrease them when output is high.
B) increase government expenditures when output is low and do nothing when output is high.
C) decrease government expenditures when output is low and increase them when output is high.
D) decrease government expenditures when output is high and do nothing when output is low.

Question 15

If aggregate demand shifts because of a wave of optimism about stock prices, those who favor a policy that "leans against the wind" would advocate the

A) Federal Reserve increase the money supply or the government increase taxes.
B) Federal Reserve increase the money supply or the government decrease taxes.
C) Federal Reserve decrease the money supply or the government increase taxes.
D) Federal Reserve decrease the money supply or the government decrease taxes.

Question 16

Studies have shown significant spending changes arise from interest rate changes after

A) a few days.
B) a few weeks.
C) a few months.
D) a few years.

Question 17

"Leaning against the wind" is exemplified by a

A) tax increase when there is a recession.
B) decrease in the money supply when there is an expansion.
C) decrease in government expenditures when there is a recession.
D) All of the above are correct.

Question 18

"Leaning against the wind" is exemplified by a

A) tax cut when there is a recession.
B) decrease in the money supply when there is a recession.
C) decrease in government expenditures when there is a recession.
D) increasing money supply when there is a boom.

Question 19

The effects of a decline in the value of financial assets, such as stocks, on consumption and the economy might be offset by

A) increasing government spending.
B) decreasing the money supply.
C) increasing taxes.
D) undertaking no policy action.

Question 20

The economy goes into recession. Which of the following lists contains things policymakers could do to try to end the recession?

A) increase the money supply, increase taxes, increase government spending
B) increase the money supply, increase taxes, decrease government spending
C) increase the money supply, decrease taxes, increase government spending
D) decrease the money supply, increase taxes, decrease government spending

Question 21

Part of the lag in monetary policy effects is due to

A) the long political process of monetary policy decisions.
B) precise economic forecasts.
C) the time required for firms and households to alter their spending plans.
D) changes in the unemployment rate.

Question 22

If there is an increase in the money supply, in the short run

A) the interest rises. It takes several weeks for spending to fully respond to this change.
B) the interest rises. It takes several months for spending to fully respond to this change.
C) the interest falls. It takes several weeks for spending to fully respond to this change.
D) the interest falls. It takes several months for spending to fully respond to this change.

Question 23

In theory the severity of recessions can be diminished with

A) an increase in government spending, which the political process cannot delay.
B) an increase in government spending, which the length of the political process can delay.
C) a decrease in government expenditures, which the political process cannot delay.
D) a decrease in government spending, which the length of the political process can delay.

Question 24

Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could

A) buy bonds. These purchases also move the price level closer to its original level.
B) buy bonds. However these purchases move the price level farther from its original level.
C) sell bonds. These sales also move the price level closer to its original level.
D) sell bonds. However these sales move the price level farther from its original level.

Question 25

In 2009 Barack Obama responded to recession

A) only by cutting taxes.
B) by cutting taxes and reducing government expenditures.
C) only by raising government expenditures.
D) by cutting taxes and by raising government expenditures.

Question 26

Which of the following is correct?

A) Economic forecasts are precise and aggregate spending responds almost immediately to interest rate changes.
B) Economic forecast are precise and aggregate spending responds to interest rate changes with a lag.
C) Economic forecasts are imprecise and aggregate spending responds almost immediately to interest rate changes.
D) Economic forecast are imprecise and aggregate spending responds to interest rate changes with a lag.

Question 27

All of the following are arguments against stabilization policy except

A) Economic forecasting is highly imprecise.
B) Long lags may cause stabilization policies to in fact destabilize the economy.
C) Monetary policy affects aggregate demand by changing interest rates.
D) Fiscal policy must go through a long political process.

Question 28

Which of the following is an argument against trying to use policy to stabilize the economy?

A) Recessions represent a waste of resources.
B) Pessimism on the part of households and firms may become a self-fulfilling prophecy.
C) "Leaning against the wind" requires policymakers to increase aggregate demand in recessions and reduce aggregate demand in booms.
D) Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time.

Question 29

If the natural rate of unemployment is 6%, but the Fed thinks it is 5% and attempts to use monetary policy to move unemployment from 6% to 5% then in the short run which of the following variables will the Fed's policy raise above their long-run levels?

A) the price level and real GDP
B) the price level but not real GDP
C) real GDP but not the price level
D) neither real GDP nor the price level

Question 30

A policymaker against stabilizing the economy would be likely to believe

A) policymakers should "do no harm".
B) there are no obstacles to the practical application of policy in real life.
C) policy lags are short enough that implementing policy changes in response to recession is not too risky.
D) policy mitigates the magnitude of economic fluctuations.

Question 31

Which of the following likely occurs when households and firms are pessimistic?

A) Increased spending.
B) Increased aggregate demand.
C) Real GDP rises.
D) The unemployment rate increases.

Question 32

In general, the longest lag for

A) both fiscal and monetary policy is the time it takes to change policy.
B) both fiscal and monetary policy is the time it takes for policy to affect aggregate demand.
C) monetary policy is the time it takes to change policy, while for fiscal policy the longest lag is the time it takes for policy to affect aggregate demand.
D) fiscal policy is the time it takes to change policy, while for monetary policy the longest lag is the time it takes for policy to affect aggregate demand.

Question 33

Which of the following likely occurs when households and firms are pessimistic?

A) Increased spending, increased aggregate demand, rising real GDP and a falling unemployment rate.
B) Decreased spending, increased aggregate demand, rising real GDP and a falling unemployment rate.
C) Decreased spending, decreased aggregate demand, falling real GDP and a falling unemployment rate.
D) Decreased spending, decreased aggregate demand, falling real GDP and a rising unemployment rate.

Question 34

If aggregate demand shifts right and the President and Congress want to use fiscal policy to reverse the change in output, they could

A) increase government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will raise output above its long-run level.
B) increase government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will reduce output to below its long-run level.
C) decrease government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will raise output above its long-run level.
D) decrease government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will reduce output to below its long-run level.

Question 35

The principal lag for monetary policy

A) and fiscal policy is the time it takes to implement policy.
B) and fiscal policy is the time it takes for policy to change spending.
C) is the time it takes to implement policy. The principal lag for fiscal policy is the time it takes for policy to change spending.
D) is the time it takes for policy to change spending. The principal lag for fiscal policy is the time it takes to implement it.

Question 36

A policymaker in favor of stabilizing the economy would be likely to believe

A) recessions are a waste of resources.
B) economies must suffer through the booms and busts of the business cycle.
C) the long policy lags make implementing policy changes in response to recession too risky.
D) policy exacerbates the magnitude of economic fluctuations.

Question 37

Opponents of using policy to stabilize the economy generally believe that

A) neither fiscal nor monetary policy have much impact on aggregate demand.
B) attempts to stabilize the economy decrease the magnitude of economic fluctuations.
C) unemployment and inflation are not cause for much concern.
D) economic conditions can easily change between the start of policy action and when it takes effect.

Question 38

The principal reason that monetary policy has lags is that it takes a long time for

A) changes in the interest rate to change aggregate demand.
B) changes in the money supply to change interest rates.
C) the Fed to make changes in policy.
D) the federal government to change the tax code.

Question 39

Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

A) buy bonds. These purchases also move the price level closer to its original level.
B) buy bonds. However these purchases move the price level farther from its original level.
C) sell bonds. These purchases also move the price level closer to its original level.
D) sell bonds. However these purchase move the price level farther from its original level.

Question 40

The Federal Reserve

A) requires little time to change policy and aggregate demand responds quickly.
B) requires little time to change policy but aggregate demand responds slowly.
C) usually requires a substantial time to change policy but aggregate demand responds quickly.
D) usually requires a substantial time to change policy and aggregate demand responds slowly.

Question 41

In which cases were tax cuts followed by robust growth?

A) the ones of the Kennedy administration in 1964 and the ones of the Reagan administration in 1981
B) the ones of the Kennedy administration in 1964 but not the ones of the Reagan administration in 1981
C) the ones of the Reagan administration in 1981 but not the ones of the Kennedy administration in 1964
D) neither the ones of the Kennedy administration in 1964 nor the ones of the Reagan administration in 1981

Question 42

Paul Volcker, former chair of the Fed, implemented

A) contractionary policy which increased the popularity of the U.S. president who had appointed him.
B) contractionary policy which decreased the popularity of the U.S. president who had appointed him.
C) expansionary policy which increased the popularity of the U.S. president who had appointed him.
D) expansionary policy which decreased the popularity of the U.S. president who had appointed him.

Question 43

As compared to spending generated by a tax cut, an increase in government expenditures is likely to affect aggregate demand

A) more quickly and more likely to be spent on projects with little benefit.
B) more quickly but less likely to be spent on projects with little benefit.
C) less quickly but more likely to be spent on projects with little benefit.
D) less quickly and more likely to be spent on projects with little benefit.

Question 44

The Federal Open Market Committee

A) operates with almost complete discretion over monetary policy.
B) is required to increase the money supply by a given growth rate each year.
C) is required to keep the interest rate within a range set by Congress.
D) is required by its charter to change the money supply using a complex formula that concerns the tradeoff between inflation and unemployment.

Question 45

The political business cycle refers to

A) the fact that about every four years some politician advocates greater government control of the Fed.
B) the potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected.
C) the part of the business cycle caused by the reluctance of politicians to smooth the business cycle.
D) changes in output created by the monetary rule the Fed must follow.

Question 46

In response to recession, who primarily cut taxes rather than raised expenditures?

A) President George W. Bush and President Barack Obama
B) President George W. Bush but not President Barack Obama
C) President Barack Obama but not President George W. Bush
D) Neither President George W. Bush and President Barack Obama

Question 47

Which of the following is correct?

A) Well designed tax cuts can increase investment which fluctuates more than consumption over the business cycle.
B) Well designed tax cuts can increase investment but it fluctuates less than consumption over the business cycle.
C) Tax cuts have little effect on investment which fluctuate more than consumption over the business cycle.
D) Tax cuts have little effect on investment but it fluctuates less than consumption over the business cycle

Question 48

In response to recession, who primarily raised expenditures rather than cut taxes?

A) President George W. Bush and President Barack Obama
B) President George W. Bush but not President Barack Obama
C) President Barack Obama but not President George W. Bush
D) Neither President George W. Bush and President Barack Obama

Question 49

A 1977 amendment to the Federal Reserve Act of 1913 says the Fed should "promote" which of the following goals?

A) only price stability
B) only maximum employment
C) only price stability and maximum employment
D) price stability, maximum employment, and moderate long-term interest rates

Question 50

Supporters of using government expenditures to respond to recession

A) argue that monetary policy should be used first. An increase in the money supply will reduce interest rates.
B) argue that monetary policy should be used first. An increase in the money supply will raise interest rates.
C) argue that monetary policy should be used only after fiscal policy has been used. An increase in the money supply will reduce interest rates.
D) argue that monetary policy should be used only after fiscal policy has been used. An increase in the money supply will raise interest rates.

Question 51

Suppose a tax cut affected aggregate demand and aggregate supply. The shift in aggregate supply would make the

A) price level and real GDP change by more than otherwise.
B) price level change by more than otherwise and real GDP change by less than otherwise.
C) price level change by less than otherwise and real GDP change by more than otherwise.
D) price level and real GDP change by more than otherwise.

Question 52

If an increase in government expenditures makes taxpayers believe that taxes and the distortion then

A) consumption and investment both rise.
B) consumption will rise and investment will fall.
C) investment will fall and consumption will rise.
D) consumption and investment will both fall.

Question 53

As compared to government spending, spending generated by a tax cut is likely to affect aggregate demand

A) more quickly and more likely to be spent on projects with little benefit.
B) more quickly but less likely to be spent on projects with little benefit.
C) less quickly but more likely to be spent on projects with little benefit.
D) less quickly and more likely to be spent on projects with little benefit.

Question 54

A 1977 amendment to the Federal Reserve Act of 1913

A) requires the Federal Reserve to place more weight on promoting price stability than on promoting maximum employment.
B) requires the Federal Reserve to place more weight on promoting maximum employment than on promoting price stability.
C) requires the Federal Reserve to place equal weight on promoting price stability and maximum employment.
D) says the Federal Reserve should promote price stability and maximum employment, but does not specify how the Federal Reserve should weight these goals.

Question 55

According to computer estimates using a traditional macroeconomic model, the Obama administration found that the multiplier for tax cuts and government expenditures were respectively

A) .99 and 1.59.
B) 1.59 and .99
C) 1.3 and 1.7
D) 1.7 and 1.3

Question 56

Stimulus spending in 2009 was used for

A) building roads and bridges.
B) providing aid to local and state governments.
C) making payments to the unemployed.
D) All of the above are correct.

Question 57

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections

A) interest rates and output would rise.
B) interest rates would rise and output would fall.
C) interest rates would fall and output would rise.
D) interest rates and output would fall.

Question 58

An increase in the money supply

A) reduces interest rates and shifts aggregate demand to the right.
B) reduces interest rates and shifts aggregate supply to the right
C) raises interest rates and shifts aggregate demand to the right.
D) raises interest rates and shifts aggregate supply to the right.

Question 59

Which of the following is correct? In the 1990's

A) the Fed maintained low inflation because it had to follow a policy rule.
B) the Fed maintained low inflation even without being required to follow a policy rule.
C) the Fed was not required to follow a policy rule and let inflation move higher.
D) the Fed was required to follow a policy rule, but it provided the Fed enough discretion that inflation move higher.

Question 60

The argument that an increase in government expenditures will have a larger impact on aggregate demand than tax cuts is based on the idea that

A) tax cuts have no multiplier affect.
B) people will save part of a tax cut.
C) an increase in consumption expenditures has a smaller effect on real GDP than an equal increase in government expenditures.
D) None of the above is correct.

Question 61

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate supply shifts left, the central bank must

A) decrease the money supply, which will move output back towards its long-run level.
B) decrease the money supply, which will move output farther from its long-run level.
C) increase the money supply, which will move output back towards its long-run level.
D) increase the money supply, which will move output farther from its long-run level.

Question 62

A law that requires the money supply to grow by a fixed percentage each year would eliminate

A) the time inconsistency problem, but not political business cycles.
B) the political business cycle, but not the time inconsistency problem.
C) both the time inconsistency problem and political business cycles.
D) neither the time inconsistency problem nor political business cycles.

Question 63

As it is usually practiced, inflation targeting sets

A) a specific inflation rate for the central bank to target and prohibits it from deviating from the target even when some shock pushes inflation away from that number.
B) a specific inflation rate for the central bank to target but allows it to deviate from the target when some shock pushes inflation away from that number.
C) sets some range of inflation rates for the central bank to target but prohibits it from deviating from that range even when some shock pushes inflation outside the range.
D) sets some range of inflation rates for the central bank to target but allows it to deviate from that range even when some shock pushes inflation outside the range.

Question 64

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

A) inflation targeting.
B) the monetary policy reaction lag.
C) the time inconsistency of policy.
D) the sacrifice ratio dilemma.

Question 65

Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged, then

A) the central bank would have to decrease the money supply which would decrease output.
B) the central bank would have to decrease the money supply which would increase output.
C) the central bank would have to increase the money supply which would decrease output.
D) the central bank would have to increase the money supply which would increase output.

Question 66

Which of the following support the idea that monetary policy should be made by a rule?

A) the political business cycle and the time-inconsistency problem
B) the political business cycle but not the time-inconsistency problem
C) the time-inconsistency problem, but not the political business cycle
D) neither the political business cycle nor the time-inconsistency problem

Question 67

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, the central bank must

A) decrease the money supply, which will move output back towards its long-run level.
B) decrease the money supply, which will move output farther from its long-run level.
C) increase the money supply, which will move output back towards its long-run level.
D) increase the money supply, which will move output farther from its long-run level.

Question 68

Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level rose because of an increase in aggregate demand and a decrease in aggregate supply that kept output unchanged, then

A) the central bank would have to decrease the money supply which would decrease output.
B) the central bank would have to decrease the money supply which would increase output.
C) the central bank would have to increase the money supply which would decrease output.
D) the central bank would have to increase the money supply which would increase output.

Question 69

If a central bank had to give up its discretion and follow a rule that required it to keep inflation low,

A) the short-run Phillips curve would shift up.
B) the short-run Phillips curve would shift down.
C) the long-run Phillips curve would shift right.
D) the long-run Phillips curve would shift left.

Question 70

Time inconsistency will cause the

A) short-run Phillips curve to be higher than otherwise.
B) short-run Phillips curve to be lower the otherwise.
C) long-run Phillips curve to be farther to the right than otherwise.
D) long-run Phillips curve to be farther left than otherwise.

Question 71

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate supply shifts right, the central bank would have to

A) increase the money supply, which causes output to move closer to its long-run equilibrium.
B) increase the money supply, which causes output to move farther from long-run equilibrium.
C) decrease the money supply, which causes output to move closer to its long-run equilibrium.
D) decrease the money supply, which causes output to move farther from long-run equilibrium.

Question 72

According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

A) lower the discount rate and sell bonds.
B) lower the discount rate and buy bonds.
C) raise the discount rate and sell bonds.
D) raise the discount rate and buy bonds.

Question 73

Consider the following rule for monetary policy: r = 2 percent + $\pi$ + 1/2(y - y*)/y* + 1/2( $\pi$ - $\pi$ *), where r is the nominal federal funds rate, y is real GDP, y* is an estimate of the natural rate of output, $\pi$ is the inflation rate, and $\pi$ * is the inflation target. Other things the same, if the inflation rate rises by 1 percentage point this rule says the Fed should increase the nominal federal funds rate by

A) 1/2 percentage point
B) 1 percentage point
C) 1 and 1/2 percentage points
D) 3 and 1/2 percentage points

Question 74

The time inconsistency of monetary policy means that

A) once people have formed expectations of low inflation based on a promise by the central bank, the central bank is tempted to raise inflation to lower unemployment.
B) at some times central banks think it is more important to keep unemployment low; at other times, they think it is more important to keep inflation low.
C) monetary policy is not consistent across time because it is influenced by politics.
D) monetary policy is not consistent across time because policymakers are incompetent.

Question 75

If people in countries that have had persistently high inflation are skeptical about efforts to reduce inflation, the short-run Phillips curve will remain far to the

A) left, and the sacrifice ratio will be low.
B) left, and the sacrifice ratio will be high.
C) right, and the sacrifice ratio will be low.
D) right, and the sacrifice ratio will be high.

Question 76

If people in a country that has had persistently high inflation expect it to remain high and are skeptical of promises the central bank makes, then the Phillips curve is

A) farther to the left than otherwise. If the central bank tries to reduce inflation unemployment will rise by more than if people had believed its promises.
B) farther to the left than otherwise. If the central bank tries to reduce inflation unemployment will rise by less than if people had believed its promises.
C) farther to the right than otherwise. If the central bank tries to reduce inflation unemployment will rise by more than if people had believed its promises
D) farther to the right than otherwise. If the central bank tries to reduce inflation unemployment will rise by less than if people had believed its promises..

Question 77

Consider the following rule for monetary policy: r = 2 percent + $\pi$ + 1/2(y - y*)/y* + 1/2( $\pi$ - $\pi$ *), where r is the nominal interest rate, y is real GDP, y* is an estimate of the natural rate of output, $\pi$ is the inflation rate, and $\pi$ * is the inflation target. Which of the following statements is not correct?

A) If aggregate demand shifts right from long-run equilibrium, this rule unambiguously implies that the Fed increases the nominal interest rate.
B) If aggregate supply shifts right from long-run equilibrium at the inflation target, we cannot tell without more information whether the Fed should increase or decrease the nominal interest rate.
C) If output is at its natural level, but inflation is above its target, the Fed must increase the nominal interest rate.
D) If inflation is at its targeted level, but output is above its natural rate, the Fed must decrease the federal funds rate.

Question 78

If a government managed to reduce the time inconsistency problem by mandating that the central bank target inflation at a low rate, then

A) the long-run Phillips curve would shift right.
B) the long-run Phillips curve would shift left.
C) the short-run Phillips curve would shift up.
D) the short-run Phillips curve would shift down.

Question 79

The Federal Reserve

A) does not have an inflation targe; if it did it would likely be 1% or less.
B) does not have an inflation target; if it did it would likely be in the range of 2%.
C) does have an inflation target; it is 1%.
D) does have an inflation target; it is a range from 1-3%.

Question 80

The time inconsistency of policy implies that

A) what policymakers say they will do is generally what they will do, but people don't believe them because of current policy.
B) when people expect that inflation will be low, it is harder for the Fed to increase output by increasing the money supply.
C) people will believe Fed policy will be more inflationary than the Fed claims.
D) what policymakers say they will do is usually not what they do, but people believe them anyway.