Deck 14: The Goals, tools, and Rules of Monetary Policy

Question 1

Successful activist stabilization policy presumes that

A)the timing of policy impacts on nominal GNP are known.
B)the magnitude,size of impacts,are known.
C)the timing and magnitude of the impact of AD disturbances are known,forecasted with precision.
D)All of the above.

Answer 1

All of the above.

Question 2

To non-activists,which of the following is the most useful stabilization policy?

A)procyclical monetary and fiscal policy changes
B)countercyclical monetary changes
C)government spending changes
D)None of these.

Answer 2

None of these.

Question 3

If the demand for money is relatively stable,

A)the velocity of money will be constant.
B)the velocity of money will grow at a steady and predictable rate.
C)a fixed growth rate for the nominal money supply will lead to a stable growth rate of nominal GDP.
D)B and C are both correct.

Answer 3

B and C are both correct.

Question 4

The central issue in the stabilization policy debate is

A)the effectiveness of monetary policy and fiscal policy.
B)the effectiveness of fiscal policy,but not monetary policy.
C)the role of money in the inflationary process.
D)the location of the sources of economic instability in the economy.

Question 5

The activist response to the monetarist platform says that

A)private spending may show some stability,but monetary or fiscal policy designed to stabilize it will just make things worse.
B)private spending is stable partly because consumption spending is based on permanent income.
C)even if prices are not completely flexible in the short-run,given time there is enough flexibility for the system to return to the natural level of real GDP.
D)None of the above.

Question 6

Non-activists

A)distrust the ability of the political process to formulate sensible economic policy.
B)argue for a constant-growth-rate rule for the money supply.
C)argue that more unemployment now may prevent a lot more unemployment in the future.
D)All of the above.

Question 7

Which of the following is NOT an argument of non-activists?

A)Private expenditures tend to be stable.
B)Monetary policy is impotent relative to fiscal policy.
C)Prices are flexible in the long-run.
D)Government actions may be destabilizing.

Question 8

Activists believe that postwar instability is primarily the result of

A)erratic growth of private investment.
B)uneven changes in real government expenditures.
C)uneven changes in private consumption of durables.
D)A and C are both correct.

Question 9

Which of the following is NOT a problem in following an activist policy?

A)ineffectiveness in fiscal policy
B)lags in the effects of policies
C)multiplier uncertainty
D)forecasting errors

Question 10

If the Fed announces a new policy of slower monetary growth it will result in lower inflation and no change in output only if

A)the policy is credible and price expectations are reduced.
B)the policy is time consistent and expectations remain constant.
C)the policy is time inconsistent and expectations increase.
D)Both A and B are correct.

Question 11

The activists believe that

A)the time required for flexible prices to bring the economy back to the natural rate of unemployment is relatively short.
B)the IS curve is relatively flat because of the broad range of assets whose demand is very sensitive to changes in the interest rate.
C)the time required for flexible prices to return the economy to the natural level of real GDP is intolerably long.
D)the severity of the Great Depression was primarily related to the large decline in the supply of money.

Question 12

According to the Monetarists,"Policy activism" is difficult if not impossible to perform successfully because

A)the timing of policy impacts on nominal GDP are known.
B)the magnitude,size of impacts are known.
C)the timing and magnitude of the impact of AD disturbances are known,forecasted with precision.
D)Monetarists believe all of the above are correct.

Question 13

The increase of the real money supply by 10% by the Federal Reserve when the unemployment rate rises by 1% is an example of

A)the conduct of procyclical monetary policy.
B)the utilization of feedback policy rule.
C)the utilization of rigid policy rule.
D)the conduct of nondiscretionary fiscal policy.

Question 14

Monetarists believe that the major source of macroeconomic instability lies in

A)the private investment sector and the government sector.
B)the government sector.
C)private corporations and the government sector.
D)export and import sector.

Question 15

In the early 1970s monetary growth was relatively stable yet unemployment and prices were quite unstable.This suggests that

A)policy activism is superior to policy rules.
B)government spending must have been destabilizing.
C)monetary rules will not iron out every short-run fluctuation resulting from shocks.
D)the government was following a monetary rule.

Question 16

Non-activists are most interested in

A)the short-run level of unemployment and the effectiveness of monetary policy.
B)the long-run consequences of policies.
C)the effectiveness of monetary policy and the short-run inflation rate.
D)the short-run rate of inflation and level of unemployment.

Question 17

The activists' paradise requires

A)that government expenditures follow a fairly steady growth path.
B)the ability to forecast perfectly future changes in demand and effects of changes in policy.
C)policy to have powerful direct effects but no side-effects.
D)B and C are both correct.

Question 18

Which of the following multiplier concepts is most important from the point of view of devising an activist policy?

A)the income and money-creation multipliers
B)the dynamic multipliers,that is the timing of multiplier effects given a policy change
C)the long-term multipliers,that is the total effect from several time periods given a policy change
D)the money-creation multiplier

Question 19

Non-activists believe that the principal source of AD instability is

A)private investment spending.
B)private consumption spending.
C)erratic government policy.
D)All of the above.

Question 20

Non-activists believe that the IS curve is

A)very flat and that real output is sometimes very sensitive to monetary policy in the short run.
B)very steep and that real output is sometimes very sensitive to monetary policy in the short run.
C)very flat and that real output is not sensitive to monetary policy in the short run.
D)very steep.

Question 21

Non-activists believe that postwar instability is primarily the result of

A)erratic growth of private investment.
B)uneven changes in real government expenditures.
C)uneven changes in private consumption of durables.
D)A and C are both correct.

Question 22

According to the new classical macroeconomists,each of the following statements is true EXCEPT:

A)Disinflation will be harder to bring about because of the time-inconsistency problem.
B)Policymakers are tempted to deviate from the preannounced policy once the public changes its expectations.
C)Feedback rules are preferred to discretionary rules.
D)Disinflation will be painless if the restrictive policies announced by the government are credible.

Question 23

One of describing the debate between activists and non-activists is that

A)activists are pessimistic about the self-correcting powers of the economy but non-activists are optimistic.
B)activists tend to be oriented to the long-run but non-activists are short-run oriented.
C)non-activists are optimistic about the efficacy of stabilization policy but activists are pessimistic.
D)A and B are both correct.

Question 24

A study of estimated multipliers in the major econometric models shows that

A)the government-spending multiplier tends to increase and then later decrease over time.
B)the monetary multiplier is much larger than the government spending multiplier.
C)there is quite a bit of variation in the value of the multipliers among the models.
D)A and C are both correct.

Question 25

Activists-believe that AD is unstable because

A)business and consumer attitudes and expectations shift.
B)monetary policy is variable.
C)fiscal policy effects are unpredictable.
D)Both B and C are correct.

Question 26

The length of money or commodity demand disturbances is important to the "policy activism" debate between non-activists and activists because

A)changing the money supply affects the economy with a lag.
B)changes in private spending must be offset by policy debate.
C)Both A and B are correct.
D)None of the above is correct.

Question 27

A major problem in developing an activist policy is

A)uncertainty about the magnitude of the dynamic multiplier.
B)uncertainty about the length and variability of policy lags.
C)uncertainty about the costs of various policies.
D)All of the above are correct.

Question 28

A policymaker would prefer that the lag in the effect of a policy be

A)long and variable in magnitude or size.
B)short and fixed in magnitude or size.
C)long and fixed in magnitude or size.
D)short and variable in magnitude or size.

Question 29

The "policy ineffectiveness proposition" of the new classical attack on policy activism is based on the idea that

A)people will anticipate policy changes particularly those based on a feedback rule.
B)people will anticipate the effects of policy changes and act to offset these effects.
C)Both A and B are correct.
D)None of the above is correct.

Question 30

To be successful in stabilizing AD,the application of a constant growth-rate rule for the money supply requires

A)a constant velocity of money.
B)a steady and predictable rate of growth of the velocity of money.
C)a steady and predictable rate of growth of the velocity of income.
D)Both B and C are correct.

Question 31

Economists who support a monetary rule as opposed to an activist monetary policy believe that the effectiveness lag in monetary policy is

A)short and variable,policy changes affect AD quickly and are predictable.
B)zero,policy changes have an immediate effect on expenditures.
C)long and variable,policy changes affect AD slowly over time and are unpredictable.
D)long,but predictable.

Question 32

The "effectiveness lag" in monetary policy is the amount of time it takes

A)to collect the data to determine if a policy change is required.
B)for monetary policy to have an impact on inflation and unemployment.
C)for monetary policy to affect the money supply.
D)to collect the data to determine what effect monetary policy has had on the economy.

Question 33

According to the New Classical macroeconomic school,

A)active policy intervention is ineffective.
B)active policy intervention is undesirable and perverse.
C)active policy intervention's benefits exceed its costs.
D)active policy intervention's benefits are less than its costs.

Question 34

Which of the following is NOT an argument of non-activists?

A)private spending may show some instability but monetary or fiscal policy designed to stabilize it will just make things worse
B)private spending is stable partly because consumption spending is based on permanent income
C)even if prices are not completely flexible in the short-run,given time there is enough flexibility for the system to return to the natural level of real GNP
D)it is true that monetary and fiscal policy have destabilizing in the past,but economic knowledge is now advanced enough to permit effective countercyclical policy

Question 35

In general,activists are ________ about the ability of the economy to remain stable and non-activists are ________.

A)pessimistic;optimistic
B)optimistic;optimistic
C)pessimistic;pessimistic
D)optimistic;pessimistic

Question 36

If both money demand and commodity demand are unstable,as many activists believe,which type of policy target(s)would most likely lead to a stable economy (assuming supply-side shocks are likely to occur)?

A)money supply target
B)real GDP target
C)interest rate target
D)nominal GDP

Question 37

In general,activists are ________ about the ability of fiscal and monetary policies to stabilize AD and non-activists are ________.

A)pessimistic;optimistic
B)optimistic;optimistic
C)pessimistic;pessimistic
D)optimistic;pessimistic

Question 38

The non-activists believe that

A)the government has been a stabilizing force in the economy.
B)much of the existing unemployment voluntary.
C)the velocity of money is unstable.
D)policymakers are able to accurately forecast the future effect of current policy actions.

Question 39

Because of the lag of the effects of changes in monetary policy and the failure of forecasters to anticipate supply-side shocks as well as changes in money demand or velocity,activist policy changes have tended at times during the mid-1970s to

A)accelerate inflation during expansions.
B)increase unemployment during recessions.
C)accelerate inflation and increased unemployment.
D)dampen inflation and decrease unemployment.

Question 40

The time between the policy decision and the subsequent change in policy instruments is called the

A)data lag,the time required to collect and analyze data.
B)effectiveness lag,the time required for the change in money supply to affect real output.
C)legislative lag,the time required for policymaking body to make decisions.
D)transmission lag,the time between the change in policy and the change in policy instruments.

Question 41

Fed policies since the mid-1980s have been intended to

A)steepen the growth path of natural real GDP.
B)taper down the growth rate of actual real GDP as it approaches natural real GDP.
C)accelerate the growth rate of natural real GDP whenever actual real GDP exceeds it.
D)use the "runway" of natural real GDP as a springboard to faster growth.

Question 42

Quarterly data for the years 1988-93 for the nominal federal funds interest rate and the output ratio show that the Fed

A)reacted to a high output ratio by raising the interest rate.
B)reacted to a high output ratio by lowering the interest rate.
C)reacted to low output ratios but not to high output ratios.
D)did not react to movements in the output ratio.

Question 43

Fiscal policy in the United States is hampered by its particularly long ________ lag.

A)data
B)recognition
C)legislative
D)transmission
E)effectiveness

Question 44

The deregulation of thrift institutions in the 1970s and 1980s have made their deposits and thus their ability to finance mortgages ________ sensitive to movements in the market interest rate,thus ________ the monetary policy multiplier.

A)more,raising
B)more,lowering
C)less,raising
D)less,lowering

Question 45

The switch to flexible exchange rates in 1973 has made the effect of monetary policy on net exports a ________ important component of the monetary policy multiplier process,and thus has ________ the effectiveness lag.

A)more,lengthened
B)more,shortened
C)less,lengthened
D)less,shortened

Question 46

Which of the following groups of economic forecasters have been able to forecast "turning points" when the economy turned up or down?

A)forecasters at the Fed
B)forecasters in branches of the government other than the Fed
C)forecasters at private firms
D)none of the above
E)all of the above

Question 47

Based on the record of past business cycles as well as Fed behavior,we can estimate that for expansionary monetary policy the overall lag is approximately

A)eighteen months,about half of which is the effectiveness lag.
B)twenty months,slightly more than three-quarters of which is the effectiveness lag.
C)ten months,with less than half due to the effectiveness lag.
D)nine months,with the effectiveness lag responsible for about six months.

Question 48

The one main difficulty with a nominal GDP target rule for monetary policy is that it

A)is a difficult target to hit.
B)provides no nominal anchor.
C)requires a painful extinguishing response to an adverse supply shock.
D)performs badly when there is unstable velocity.

Question 49

Observers of the economy often complain that indicators of economic activity are often contradictory.This is an example of the ________ lag.

A)data
B)recognition
C)legislative
D)effectiveness

Question 50

Which of the following is likely to have the shortest transmission lag?

A)a change in personal income tax rates
B)a change in government expenditures
C)an increase in subsidies paid to firms
D)an increase in public-service employment

Question 51

Typically the data lag is about

A)one month.
B)about a month and a half.
C)about three months.
D)about six months.

Question 52

Fed policies since the 1980s have attempted to

A)overshoot natural real GDP.
B)undershoot natural real GDP.
C)"stall" the economy whenever natural real GDP is growing too fast.
D)A and B.
E)none of the above.

Question 53

The major difference between the lag in monetary policy versus the lag in fiscal policy stems from the

A)data lag.
B)legislative lag.
C)recognition lag.
D)transmission lag.

Question 54

Which of the following contributed to the negative output ratio experienced in the 1970s?

A)depreciation of the dollar
B)favorable oil price shocks
C)favorable farm price shocks
D)All of the above

Question 55

Policy makers usually wait for ________ months of data to confirm a change.

A)two
B)three
C)four
D)six

Question 56

Data indicate that the economy's response to monetary policy became noticeably weaker and more stretched out during

A)1961-75.
B)1976-90.
C)1991-2007.
D)None of the above.The response has grown stronger and shorter.

Question 57

With lags in monetary policy,an effective expansionary policy must be initiated many months ________ the start of the economic downturn it is intended to moderate,and this requires ________ economic forecasts.

A)before,generating accurate
B)before,ignoring
C)after,generating accurate
D)after,ignoring

Question 58

During which of the following decades has the output ratio been staying closest to zero?

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

Question 59

Since the mid-1980s,Federal Reserve policies have often been described as attempting

A)accelerated takeoffs.
B)sustained growth.
C)stalling tactics.
D)soft landings.

Question 60

The measure of the effectiveness lag for a change in monetary policy is the length of time necessary for ________ of the ultimate effect to be felt.

A)one-quarter
B)one-half
C)three-quarters
D)all

Question 61

A monetary policy which is likely to bring about a "soft landing" requires that interest rates be ________ while inflation is ________ and unemployment is ________ the natural level.

A)raised,rising,above
B)raised,falling,below
C)lowered,falling,above
D)lowered,rising,below

Question 62

Which of the following does NOT contribute to the choice of a policy of hyperinflation?

A)war
B)increased price of energy paid to foreigners
C)price of export commodities increase
D)diminished ability to collect taxes

Question 63

Policy activists' hope that they can undertake successful stabilization policy is ________ by the fact that natural real GDP ________ during recessions.

A)improved,falls
B)worsened,falls
C)improved,increases
D)worsened,increases

Question 64

The European Monetary Union,which preceded the Euro,was

A)opposed by most politicians.
B)favored by most economists.
C)likely to improve the use of monetary policy to deal with contractionary shocks which strike only one or two countries in Europe.
D)all of the above.
E)none of the above.

Question 65

Expenditure changes may be potentially inequitable,as are tax changes,because

A)their spatial distribution must be determined by the legislature.
B)their spatial distribution must be determined by the Fed.
C)the government is slow to implement new programs.
D)unlike Japan,public works projects are the province of the executive branch.

Question 66

If the Federal Reserve wants to control the level of interest rates

A)it must keep the supply of money constant.
B)it must let the money supply grow at a constant rate.
C)it can do so only if it also stabilizes nominal GDP.
D)it will have to give up control of the money supply.

Question 67

The consensus reached in the late 1990s was that from the 1980s onward the Fed had been

A)quicker to stimulate or restrain the economy when its output fell short of or exceeded its natural level.
B)quicker to stimulate the economy when output fell short of the natural level,but slower to do so when output exceeded the natural level.
C)slower to stimulate the economy when output fell short of the natural level,but quicker to do so when output exceeded its natural level.
D)slower to stimulate or restrain the economy when its output fell short of or exceeded its natural level.

Question 68

The Euro,like the European Monetary Union which preceded it,is

A)opposed by most politicians.
B)favored by most economists.
C)likely to improve the use of monetary policy to deal with contractionary shocks which strike only one or two countries in Europe.
D)all of the above.
E)none of the above.

Question 69

The lag between changes in the Fed's interest rate target and large responses of output means that the Fed may want to ________ interest rates ________ output recovers to its natural level.

A)raise,after
B)lower,before
C)raise,before
D)lower,after

Question 70

During which of the following years did the Fed fail to pursue a policy aimed at stabilizing the output ratio?

A)1988
B)1990
C)1994
D)1997

Question 71

During recessions natural real GDP

A)falls.
B)increases.
C)remains constant.
D)A,B,or C do occur during any given recession.

Question 72

Which of the following monetary policies could reduce the amplitude of oscillations of output around its natural level?

A)raising interest rates before actual output attains its natural level
B)lowering interest rates when an economy is still overheated
C)lowering interest rates when output is above its natural level
D)all of the above.

Question 73

In which of the following years did oil price movements contribute to holding down inflation?

A)1986
B)1998
C)2001
D)All of the above.

Question 74

When existing stocks of resources are being heavily utilized,actual output is

A)likely to grow much faster than natural output.
B)likely to grow more slowly than natural output.
C)equal to natural output.
D)no longer tied to natural output.

Question 75

Gordon believes that the expansion which began in 1982 did so because of the

A)expansionary monetary policy which was pursued.
B)Reagan tax cuts,the passage of the Economic Recovery Act in 1981.
C)increases in consumer and business firm optimism concerning future business conditions.
D)A and B are both correct.

Question 76

A central bank commitment to a ________ rule for monetary growth can be conveyed by maintaining a ________ exchange rate.

A)rigid,fixed
B)rigid,flexible
C)flexible,fixed
D)non-inflationary,flexible

Question 77

At the end of the 1980s,bank regulators ________ various standards by which bank performance is measured thereby ________ banks willingness to lend.

A)lowered,increasing
B)raised,increasing
C)lowered,decreasing
D)raised,decreasing

Question 78

Supply shocks after 1985

A)forced the Fed to follow restrictive monetary policy and caused a negative output ratio.
B)forced the Fed to follow restrictive monetary policy and caused a positive output ratio.
C)allowed the Fed to follow accommodative monetary policy and caused a negative output ratio.
D)allowed the Fed to follow accommodative monetary policy and push the output ratio toward zero.

Question 79

To reduce economic volatility the Fed should push the economy toward a

A)positive output ratio.
B)negative output ratio.
C)zero output ratio.
D)All of the above are consistent with reduced volatility.

Question 80

The major difference in the efficacy of monetary policy relative to fiscal policy is

A)the longer recognition lag for fiscal policy.
B)the shorter recognition lag for fiscal policy.
C)the longer legislative lag for fiscal policy.
D)the longer data lag for fiscal policy.