Deck 15: Inflation: Phillips Curves and Neo-Fisherism

Question 1

In the Basic New Keynesian model, the optimum for the central bank is/are

A) a target for the money supply.
B) targets for inflation and the quantity of investment.
C) targets for inflation and the real interest rate.
D) targets for fiscal policy and inflation.
E) targets for the Bank Rate and the deposit rate.

Answer 1

C

Question 2

In 1981, inflation in Canada reached

A) 20%.
B) 200%.
C) 13%.
D) 5%.
E) 2%.

Answer 2

C

Question 3

In the Basic New Keynesian model, if anticipated future inflation increases, the central bank should

A) hold the nominal interest rate constant.
B) increase the nominal interest rate one-for-one with the decrease in the anticipated future inflation rate.
C) reduce the nominal interest rate one-for-one with the decrease in the anticipated future inflation rate.
D) increase the nominal interest rate less than one-for-one with the decrease in the anticipated future inflation rate.
E) reduce the nominal interest rate less than one-for-one with the decrease in the anticipated future inflation rate.

Answer 3

E

Question 4

In the Basic New Keynesian model, a firm that cannot change its price

A) must satisfy the demand for its product.
B) chooses output optimally.
C) will not produce.
D) produces what the government says it should.
E) earns zero profits.

Question 5

In the Basic New Keynesian model, a decrease in the natural rate of interest causes the following effect:

A) nothing.
B) output declines and inflation goes up.
C) output declines and inflation goes down.
D) output increases and inflation goes down.
E) output increases and inflation goes up.

Question 6

In practice, the Bank of Canada

A) does not target inflation.
B) has a dual mandate, just like the U.S. central bank.
C) targets inflation, but clearly cares about real economic activity too.
D) cares only about the path for the money supply.
E) targets anticipated future inflation.

Question 7

Inflation costs do not arise because of

A) sticky prices.
B) sticky wages.
C) people economizing on currency holdings because of anticipated inflation.
D) unexpectedly low inflation redistributing wealth from borrowers to lenders.
E) unexpectedly high inflation redistributing wealth from lenders to borrowers.

Question 8

In the Basic New Keynesian model, there are two curves:

A) the output supply curve and the money demand curve.
B) the output demand curve and the labour supply curve.
C) the output supply curve and the Phillips curve.
D) the output demand curve and the Phillips curve.
E) the money supply curve and the Phillips curve.

Question 9

In the Basic New Keynesian model, the Phillips curve specifies that inflation

A) increases when the anticipated future rate of inflation decreases.
B) decreases when output increases.
C) increases when the efficient level of output increases.
D) decreases when taxes increase.
E) increases when the difference between output and efficient output increases.

Question 10

Thomas Sargent studied hyperinflations that occurred when?

A) in the 19?? century
B) during the 1970s
C) during the Great Recession
D) during the Great Depression
E) in the 1920s

Question 11

In the Basic New Keynesian model, if anticipated future inflation decreases,

A) output falls and inflation falls.
B) output rises and inflation falls.
C) output stays the same and inflation falls.
D) output rises and inflation rises.
E) output and inflation stay the same.

Question 12

At the end of 2015, Venezuelan inflation approached

A) 200%.
B) 10,000%.
C) 13%.
D) 2%.
E) -20%.

Question 13

The Phillips curve had a recent resurgence in

A) real business cycle theory.
B) New Monetarist economics.
C) Neo-Fisherian economics.
D) New Keynesian economics.
E) New Sticky economics.

Question 14

In the Basic New Keynesian model, if the central bank is initially achieving its goals, and the natural rate of interest rises, the central bank should

A) reduce the nominal interest rate by the amount of the natural real interest rate increase.
B) reduce the nominal interest rate by less than the amount of the natural real interest rate increase.
C) do nothing.
D) increase the nominal interest rate by the amount of the natural real interest rate increase.
E) increase the nominal interest rate by less than the amount of the natural real rate of interest increase.

Question 15

Real interest rates have declined

A) only in Canada.
B) only in Europe.
C) only in the United States.
D) worldwide.
E) only in Canada and the United States.

Question 16

There are costs associated with

A) uncharted inflation.
B) unrealized inflation.
C) incipient inflation.
D) unanticipated inflation.
E) unbelievable inflation.

Question 17

The Phillips curve was first noticed in data for

A) the United Kingdom.
B) the United States.
C) Canada.
D) Zimbabwe.
E) Russia.

Question 18

The Fisher relation states that

A) the nominal interest rate equals the anticipated future inflation rate minus the real interest rate.
B) the real interest rate equals minus the anticipated future inflation rate plus the nominal interest rate.
C) the nominal interest rate equals the real interest rate.
D) the real interest rate equals the nominal interest rate plus the anticipated future inflation rate.
E) the anticipated future inflation rate equals the nominal interest rate plus the real interest rate.

Question 19

When firms are subject to Calvo pricing,

A) they price their output at the Calvo lower bound.
B) they can change their prices at will.
C) they change their prices every other year.
D) when they change their prices is determined at random.
E) they can never change their prices.

Question 20

In the Basic New Keynesian model, the Phillips curve specifies that, when the anticipated future rate of inflation increases, inflation

A) increases more than one-for-one.
B) increases one-for-one.
C) increases less than one-for-one.
D) stays the same.
E) decreases.

Question 21

"Secular stagnation" is an idea popularized by

A) Larry Winters.
B) Ben Bernanke.
C) Milton Berle.
D) Lawrence Summers.
E) John Maynard Keynes.

Question 22

Rational expectations implies

A) that consumers can be systematically fooled.
B) that in models with aggregate shocks, consumers and firms always correctly forecast inflation.
C) that the central bank always foresees what the fiscal authority will do.
D) that the consumers and firms in models do the best they can in forecasting future economic variables.
E) that models in which we make this assumption are always right.

Question 23

In the New Keynesian Rational Expectations model with a Taylor rule, if the central bank follows the Taylor principle, in the steady state in which nominal interest rate is zero,

A) the central bank hits its inflation target.
B) inflation is lower than the central bank's target.
C) inflation is higher than the central bank's target.
D) inflation is greater than zero.
E) inflation is zero.

Question 24

A low natural real interest rate might result in

A) a global savings shortage.
B) a liquidity trap.
C) an investment trap.
D) a liquidity shortage.
E) a secular glut.

Question 25

In the Basic New Keynesian model, when there is a liquidity trap, if the central bank promises higher inflation in the future, then

A) output falls and inflation falls.
B) output falls and inflation rises.
C) output rises and inflation rises.
D) output and inflation stay the same.
E) output rises and inflation falls.

Question 26

In the New Keynesian Rational Expectations Model, in the output demand relationship,

A) output increases when the nominal interest rate increases.
B) the difference between current output and future output increases when the nominal interest rate increases.
C) the difference between current output and future output increases when the natural real interest rate increases.
D) the difference between current output and future output increases when anticipated future inflation decreases.
E) the difference between current output and future output increases when the actual real interest rate increases.

Question 27

In the Basic New Keynesian Model, an unconventional policy that works in a liquidity trap is

A) a money supply increase.
B) a reduction in the nominal interest rate.
C) an increase in the nominal interest rate.
D) forward guidance.
E) a reduction in the real interest rate.

Question 28

In the New Keynesian Rational Expectations model with a Taylor rule, if the central bank follows the Taylor principle,

A) there is no steady state.
B) there are three steady states.
C) there are many steady states.
D) there are two steady states.
E) there is one steady state.

Question 29

The following is a suggested cause of the long-term decline in real interest rates

A) an increase in financial market frictions.
B) the global investment glut.
C) secular growth.
D) low savings in China.
E) sticky prices.

Question 30

The Neo-Fisherian result that increasing the nominal interest rate increases inflation is a startling one because

A) this result is obtained in a New Keynesian model that is usually used to justify conventional central banking ideas.
B) it is wrong.
C) Keynes would agree with it.
D) Steve Poloz supports Neo-Fisherism.
E) it also holds in the Basic New Keynesian model.

Question 31

Neo-Fisherians assert

A) that the New Keynesian model is wrong.
B) that the central bank cannot control inflation.
C) that traditional central bankers have inflation control wrong.
D) that Irving Fisher was wrong.
E) that Stanley Fisher is right.

Question 32

To make forward guidance work,

A) the central bank must follow through on its promises.
B) it is important that the central bank surprise the public.
C) the central bank must not follow through on its promises.
D) fiscal policy must support monetary policy.
E) consumers cannot be forward-looking.

Question 33

In the New Keynesian Rational Expectations model, when the nominal interest rate is constant forever,

A) in the long run, the inflation rate equals the natural real rate of interest minus the nominal interest rate.
B) in the long run, the inflation rate equals minus the natural real rate of interest minus the nominal interest rate.
C) in the long run, the inflation rate equals minus the natural real rate of interest plus the nominal interest rate.
D) in the long run, the inflation rate equals the natural real rate of interest plus the nominal interest rate.
E) in the long run, the inflation rate explodes.

Question 34

The idea of a "savings glut" was put forward by

A) Lawrence Summers.
B) Ben Bernanke.
C) Lawrence Bernanke.
D) Milton Friedman.
E) Steve Poloz.

Question 35

Forward guidance, in the Basic New Keynesian model, is

A) a guide in the forward to the central bank statement.
B) a promise about future fiscal policy.
C) a promise concerning future inflation.
D) always a promise of no future inflation.
E) a commitment guide the public in the future.

Question 36

In the New Keynesian Rational Expectations model, an increase in the nominal interest rate

A) causes output to decrease.
B) has no effect on output.
C) causes inflation to fall.
D) causes inflation to rise.
E) has no effect on inflation.

Question 37

An example of an arrangement that helps to enforce commitment by a central bank is

A) the Bank of Canada's interest rate target.
B) New Zealand's Policy Targets Agreement.
C) an independent central bank.
D) deposit insurance.
E) the lender of last resort.

Question 38

Taylor's simplified 1993 rule states that

A) the nominal interest rate increases less than one-for-one with the inflation rate.
B) the nominal interest rate increases one-for-one with the natural real rate of interest.
C) the zero lower bound is irrelevant.
D) the nominal interest rate increases one-for-one with the inflation rate.
E) the nominal interest rate should not depend on the natural real rate of interest.

Question 39

In the New Keynesian Rational Expectations model, when the nominal interest rate is constant forever,

A) there is one equilibrium, which does not satisfy the long-run Fisher relation.
B) there are two equilibria, both of which satisfy the long-run Fisher relation.
C) there are many equilibria, none of which satisfy the long-run Fisher relation.
D) there is one equilibrium, and it satisfies the long-run Fisher relation.
E) there are many equilibria, but each equilibrium satisfies the Fisher relation in the long run.

Question 40

In the New Keynesian Rational Expectations Model, in the Phillips curve relationship,

A) inflation does not depend on anticipated future inflation.
B) inflation increases one-for-one with anticipated future inflation.
C) inflation increases more than one-for-one with anticipated future inflation.
D) inflation increases less than one-for-one with anticipated future inflation.
E) inflation decreases when anticipated future inflation increases.

Question 41

Neo-Fisherism

A) is widely accepted.
B) was introduced Keynes.
C) was introduced by Irving Fisher in the 1920s.
D) involves thinking about radical new models.
E) involves understanding how conventional macroeconomic models work.

Question 42

Discuss the key ideas in Neo-Fisherism. Discuss how Neo-Fisherism departs from conventional ideas about how central banking works, and why central bankers may have trouble accepting Neo-Fisherian ideas.

Question 43

In the New Keynesian Rational Expectations model with a Neo-Fisherian Monetary Policy Rule,

A) the central bank exceeds its inflation target forever.
B) the central bank undershoots its inflation target for, at most, one period.
C) the central bank undershoots its inflation target forever.
D) there are two steady states.
E) the central bank only undershoots its inflation target in the zero lower bound steady state.