Questions:
1. Suppose a parent paid your college tuition this year. He or she wants you to get a summer job so you can contribute next year. You would prefer to spend your time with friends at the beach. Your parent says, "There's no way I'll pay for everything next year. If you don't get a job, you'll have to take a semester off." Which concept are you applying when you consider whether to take this threat seriously?
A. well-intentioned mistakes
B. time-consistency
C. rational expectations
D. adaptive expectations
2. Suppose the Phillips curve becomes steeper: a given change in output has a larger effect on inflation. How does this affect the time-consistency problem facing the central bank and the likelihood of high inflation? (Hint: Think about the surprise-inflation decision in Figure 16.2.)
A. The central bank has more of an incentive to create surprise inflation and the time-consistency problem is magnified.
B. The central bank has less of an incentive to create surprise inflation and the time-consistency problem is lessened.
C. The central bank has more of an incentive to create surprise inflation and the time-consistency problem is lessened.
D. None of the given answers are correct.
3. According to the Kydland-Prescott theory central bankers can only be considered conservative if they:
A. hate inflation and unemployment passionately.
B. hate unemployment passionately.
C. hate inflation passionately.
D. None of given answers are correct.
4. Governors of the Federal Reserve serve overlapping terms in office. When one governor is appointed, the others are at various points in their terms. Suppose a new law mandates that all governors are appointed at the same time for concurrent terms.What will be the effect of this law?
A. This law will increase the risks of policy rules.
B. This law will decrease the risks of policy rules.
C. This law will increase the risks of discretionary monetary policy.
D. This law will decrease the risks of discretionary monetary policy.
5. Consider the relationship between inflation targeting and Taylor rules (Section 15.3). If a central bank shifts from flexible inflation targeting to strict targeting, does the equivalent Taylor rule become more or less aggressive? (A more aggressive rule responds more strongly to movements in output and inflation.)
A. Moving to strict inflation targeting has no impact on the Taylor rule.
B. The Taylor rule becomes less aggressive under strict inflation targeting.
C. The Taylor rule becomes more aggressive under strict inflation targeting.
D. Inflation targeting and the Taylor rule are unrelated concepts, sothe question cannot be answered.
6. If the United States adopted inflation targeting, how might that affect the reaction of the stock market to appointments of the Federal Reserve chair?
A. Typically the stock market does not react to appointments of a new Fed chair.
B. With inflation targeting the stock market will typically increase when a new Fed chair is appointed.
C. With inflation targeting the stock market will react less to new Fed appointments.
D. With inflation targeting the stock market will typically decline when a new Fed chair is appointed.
7. Figures12.22 and 12.23on p. 377 show the effects of an adverse supply shock in the AE/PC model. The figures assume adaptive inflation expectations: πe = π(-1)andshow how the economy evolves if the central bank accommodates the supply shock and if it doesn't. Now suppose the central bank adopts an explicit inflation target, πT. Inflation expectations become anchored at the target: πe = πT. With an explicit inflation target:
A. accommodative monetary policy will lead to a temporary increase in the inflation rate.
B. accommodative monetary policy will lead to a permanent increase in the inflation rate.
C. non-accommodative monetary policy will lead to lower inflation rates.
D. non-accommodative monetary policy will lead to higher inflation rates.
8. Consider a policy of "output and inflation targeting": the central bank announces numerical targets for both inflation and real GDP. What are the drawbacks of such a policy?
A. Potential output is hard to measure, so the central bank may pursue the wrong output target.
B. The central bank might have to engage in restrictive policy when output is too high, a politically difficult position to defend.
C. Achieving both output and inflation targets can be impossible, since output and inflation are jointly determined.
D. All of the given answers are correct.
9. Suppose the growth rate of Europe's money supply exceeds the ECB's reference value, leading the ECB to raise its interest rate target. Will this action push money growth toward the reference value? (Hint: Review money and interest-rate targeting in Section 11.6).
A. With stable money demand, targeting a higher interest rate implies restricting the money supply which pushes the money growth rate toward the reference value.
B. With stable money demand, targeting a higher interest rate implies expanding the money supply which does not push the money growth rate toward the reference value.
C. With unstable money demand, targeting a higher interest rate implies restricting the money supply which pushes the money growth rate toward the reference value.
D. With stable money demand, targeting a higher interest rate implies expanding the money supply which pushes the money growth rate away from the reference value.
10. In 2006, Ben Bernanke said the goals of strong output growth and low inflation "are almost always consistent with each other." Alan Greenspan once called the trade-off between output and inflation "ephemeral." Why do you think the chairmen made these statements?
A. The chairmen made these statements to address the issue of central bank independence.
B. The chairmen made these statements to address the issue of inflation targeting.
C. The chairmen made these statements to address the issue of policy rules.
D. The chairmen made these statements to address the issue of time-consistency.