Question 1

A central bank operating with discretion can achieve the same outcome as the central bank committed to a fixed rule of zero inflation if:

Accepted Answer

A) there are no inside lags. 
B) there are no outside lags. 
C) the central bank dislikes unemployment much more than inflation. 
D) the central bank dislikes inflation much more than unemployment.

Question 2

Conducting fiscal policy so that G = T, where G is government expenditures and T is tax revenue, is an example of a(n):

Accepted Answer

A) active rule. 
B) passive rule. 
C) discretionary policy. 
D) automatic stabilizer.

Question 3

Compare two procedures for conducting monetary policy:
Method 1: Maintain a steady money growth of 6 percent per year
Method 2: Maintain a steady inflation rate of 3 percent per year
Be sure to consider whether the methods involve (1) active or passive monetary policy and (2) rules or discretion. Discuss why one method might be preferred over the other.

Accepted Answer

The answer of Compare two procedures for conducting monetary policy:
Method...

Question 4

A monetary policy rule that targets nominal GDP would _____ money growth when nominal GDP rises above the target and _____ money growth when nominal GDP falls below the target.

Accepted Answer

A) reduce; raise 
B) raise; reduce 
C) reduce; reduce 
D) raise; raise

Question 5

Arguments in favour of passive economic policy include all of the following except:

Accepted Answer

A) monetary and fiscal policies work with long and variable lags, which can produce destabilizing results. 
B) economic forecasts have too large a margin of error to be useful in formulating stabilization policy. 
C) recessions do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary. 
D) it is difficult to assess the effects of different policies on the economy.

Question 6

In practice, inflation targeting is better considered as operating with constrained discretion rather than according to a policy rule because central banks with inflation targets typically:

Accepted Answer

A) are not allowed to adjust the target in the event of shocks. 
B) set the inflation target as a range rather than as a particular number. 
C) are not held accountable for achieving their target. 
D) must achieve their target regardless of economic conditions.

Question 7

Monetarists believe all of the following except:

Accepted Answer

A) fluctuations in the money supply are responsible for most fluctuations in the economy. 
B) the Bank of Canada should keep the money supply growing at a steady rate. 
C) slow and steady growth of the money supply would yield stable output, employment, and prices. 
D) the Bank of Canada should adjust the money supply to adjust to various shocks to the economy.

Question 8

Let the symbol π stand for the rate of inflation, with Eπ the expected inflation rate, both measured in percentage. The letter u is the unemployment rate and uⁿ is the natural rate of unemployment. Suppose the short-run Phillips curve is u = uⁿ - α (π - Eπ) applies in a certain economy. The Bank of Canada's loss function is L (u, π) = u + γπ². The analysis in the appendix to textbook Chapter 16 shows that if the Bank of Canada minimizes its loss function under the assumption that Eπ is fixed and "rational" private agents know this, the expected inflation rate will be Eπ = α/2γ, and this will also be the inflation rate the government chooses. a.Suppose that α = 0.5 and γ = 0.05. What are the expected and actual inflation rates? b.Suppose α = 0.5 and γ = 0.50. In this case, does the Bank of Canada have greater or lesser relative distaste for inflation than in part a? What are the expected and actual inflation rates with γ = 0.50? Why do they differ from the inflation rates in part a?

Accepted Answer

The answer of Let the symbol π stand for the...

Question 9

Inflation targeting is a monetary policy rule that requires the central bank to adjust _____ in order to attain the desired inflation rate.

Accepted Answer

A) a price index 
B) the velocity of money 
C) nominal GDP 
D) the money supply

Question 10

The time between a shock to the economy and the policy action responding to that shock is called the:

Accepted Answer

A) automatic stabilizer. 
B) time inconsistency of policy. 
C) inside lag. 
D) outside lag.

Question 11

A policy rule:

Accepted Answer

A) must specify money growth at a constant rate. 
B) must specify an active policy. 
C) must specify a passive policy. 
D) may specify either an active or a passive policy.

Question 12

If the velocity of money varies a great deal, steady growth of the money supply is a(n):

Accepted Answer

A) ineffective way to stabilize aggregate demand. 
B) example of discretionary monetary policy. 
C) automatic stabilizer. 
D) active policy rule.

Question 13

The lag between the time that the money supply is increased and the time that investment expenditures increase is an example of a:

Accepted Answer

A) fiscal inside lag. 
B) fiscal outside lag. 
C) monetary inside lag. 
D) monetary outside lag.

Question 14

Economic research finds that greater central-bank independence is _____ correlated with lower and more stable inflation as well as _____ correlated with the average growth and variability of real GDP.

Accepted Answer

A) strongly; strongly 
B) strongly; not 
C) not; strongly 
D) not; not

Question 15

The following notice appeared on a full page of the Wall Street Journal on February 9, 2009:
​
"There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy."-U.S. President-Elect Barack Obama, January 9, 2009
With all due respect, Mr. President, that is not true. Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More U.S. government spending by Presidents Hoover and Roosevelt did not pull the United States out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the United States today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.
​
The statement was signed by more than 200 economists, including 3 Nobel Laureates.
a.Comment on the extent to which the disagreement between the U.S. president and the economists involves a disagreement about whether policy should be passive or active.
b.Identify the rationale(s) used to support the economists' position.​​

Accepted Answer

The answer of The following notice appeared on a full...

Question 16

If the Bank of Canada has discretion to choose its own policy and announces a policy of low inflation, then:

Accepted Answer

A) the policymaker is required to make the money supply grow at a low rate. 
B) private economic agents are sure to believe the announcement because it is credible. 
C) private economic actors are likely to discount the policy because the Bank of Canada has an incentive to renege on its policy once expectations are formed. 
D) the Bank of Canada is certain to renege on its policy once expectations are formed because then it can lower unemployment with minimum inflation.

Question 17

If a city passes laws limiting rents on apartments but promises to exempt buildings not yet built:

Accepted Answer

A) construction of new buildings will not be discouraged. 
B) construction of new buildings may be discouraged. 
C) builders will not expect the city to renege on its promise. 
D) the city will have no incentive to renege on its promise.

Question 18

The lags involved in implementing monetary and fiscal policy are:

Accepted Answer

A) short and predictable. 
B) long and predictable. 
C) short and variable. 
D) long and variable.

Exam 16: Alternative Perspectives on Stabilization Policy