Question 1

The rate of inflation increases when ________.

Accepted Answer

A)  the unemployment rate equals the NAIRU 
B)  the unemployment rate exceeds the NAIRU 
C)  the unemployment rate is less than the NAIRU 
D)  the unemployment rate increases faster than the NAIRU increases

Question 2

The first country to adopt inflation targeting was ________.

Accepted Answer

A)  the United Kingdom 
B)  Canada 
C)  New Zealand 
D)  Australia

Question 3

The Bank of Canada can engage in preemptive strikes against a rise in inflation by ________ the overnight rate; it can act preemptively against negative demand shocks by ________ the overnight rate.

Accepted Answer

A)  raising; lowering 
B)  raising; raising 
C)  lowering; lowering 
D)  lowering; raising

Question 4

Interest rates are difficult to measure because ________.

Accepted Answer

A)  data on them are not available in a timely manner 
B)  real interest rates depend on the hard-to-determine expected inflation rate 
C)  they fluctuate too often to be accurate 
D)  they cannot be controlled by the Bank of Canada

Question 5

Which of the following is a disadvantage of inflation targeting?

Accepted Answer

A)  There is transparency. 
B)  Inflation targeting does not rely on a stable money-inflation relationship. 
C)  It imposes a rigid rule. 
D)  Inflation targeting reduces the effects of inflation shocks.

Question 6

Tight monetary policy in New Zealand ________.

Accepted Answer

A)  brought inflation down to below 2 percent 
B)  reduced unemployment 
C)  experienced a growth rate occasionally greater than 5 percent 
D)  all of the above

Question 7

Give five reasons why central banks should not try to prick an asset-price bubble.

Accepted Answer

The answer of Give five reasons why central banks should...

Question 8

Which of the following best explains why the Bank of Canada does not use nominal GDP as an intermediate target?

Accepted Answer

A)  Nominal GDP has little connection with Bank policy goals. 
B)  Nominal GDP is unaffected by open market operations. 
C)  The Bank has little direct control over nominal GDP. 
D)  None of the above.

Question 9

According to the Taylor rule, the Bank of Canada should raise the overnight interest rate when inflation ________ the Bank of Canada's inflation target or when real GDP ________ the Bank of Canada's output target.

Accepted Answer

A)  rises above; drops below 
B)  drops below; drops below 
C)  rises above; rises above 
D)  drops below; rises above

Question 10

Inflation targeting includes ________.

Accepted Answer

A)  a public announcement of medium-term targets for inflation 
B)  an institutional commitment to price stability as the primary long run goal 
C)  an information-inclusive approach in which many variables are used in making decisions about monetary policy 
D)  all of the above

Question 11

During the 1975-1981 period, the Bank of Canada decided to target the growth rate of M1 because it ________.

Accepted Answer

A)  was the most prominent measure of money 
B)  had a stable demand 
C)  had a predictable relationship with income and prices 
D)  All of the above.

Question 12

Which of the following is a potential operating instrument for the central bank?

Accepted Answer

A)  The monetary base 
B)  The exchange rate 
C)  The inflation rate 
D)  The bank rate

Question 13

Inflation leads to ________.

Accepted Answer

A)  price instability 
B)  lower economic growth 
C)  public hostility 
D)  all of the above

Question 14

Which of the following is an advantage to monetary targeting?

Accepted Answer

A)  There is almost immediate accountability. 
B)  It does not rely on a stable money-inflation relationship. 
C)  It implies lack of transparency. 
D)  It implies smaller output fluctuations.

Question 15

Which of the following is a NOT an advantage to monetary targeting?

Accepted Answer

A)  It relies on a stable money-inflation relationship. 
B)  There is a delayed signal about the achievement of a target. 
C)  It implies larger output fluctuations. 
D)  It implies a lack of transparency.

Question 16

Using Taylor's rule, when the equilibrium real overnight rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal overnight rate target should be ________.

Accepted Answer

A)  5 percent 
B)  5.5 percent 
C)  6 percent 
D)  6.5 percent

Exam 17: The Conduct of Monetary Policy: Strategy and Tactics