Questions:
1. Suppose that country A and country B have the same rate of money growth, and velocity is constant in both. Output growth is higher in country A. How do country A's and country B's inflation rate compare?
A. Country A's inflation rate is higher than country B's inflation rate.
B. Country B's inflation rate is higher than country A's inflation rate.
C. Both countries face the same inflation rate because the money growth rates are identical.
D. There is not enough information to answer the question.
2. In Figure 14.1, the relation between money growth and inflation is less perfect among countries with inflation below ten percent than it is among countries with higher inflation. What might explain this difference?
A. Money growth is a more important source for the differences in inflation rates when inflation is above 5%.
B. The Phillips curve relationship works more directly when inflation rates are above 5%.
C. The Phillips curve relationship has a stronger effect when inflation is above 5%.
D. Differences in output growth are a more important source for the differences in inflation rates when inflation is above 5%.
3. The advantage of returning to the gold standard is ____ while the disadvantage is _____ .
A. a stable money supply; more unstable and higher inflation.
B. stable output; more unstable and higher inflation.
C. lower risk of high inflation; unstable output.
D. lower risk of high inflation; unstable output and inflation.
4. Assume that a central bank's nominal seigniorage revenue equals the change in the money supply, denoted ΔM. Real seigniorage revenue is ΔM/P. Assume the inflation rate equals the growth rate of the money supply, which is ΔM/M. Write real seigniorage revenue in terms of the inflation rate and the real money supply, M/P.
A. ΔM/P = (ΔM/M)(M/P).
B. ΔM/P = (ΔP/P)(M/P).
C. ΔM/P = (ΔM/P)(M/P).
D. ΔM/P = (ΔM/ΔP)(M/P).
5. Suppose all firms in an economy adjust prices once per year. Half the firms adjust prices in January, and half adjust in July. Suppose inflation rises from 0 to 10 percent per year. What is the likely effect on the variability of relative prices?
A. The higher the inflation rate, the higher the variability of the relative prices.
B. The level of the inflation rate will not impact the variability of relative prices.
C. The higher the inflation rate, the lower the variability of the relative prices.
D. Both, scenario B. and C. are possible.
6. Consider the market for loanable funds, which determines the real interest rate in the long run (see Section 4.1). In this market supply and demand for loans are functions of the pretax real interest rate r. Suppose savers are taxed on their nominal interest income. What happens to the equilibrium levels of the pretax real interest rate, loans, and investment?
A. The pretax real interest rate falls, the amount of loans increases and investment increases.
B. The pretax real interest rate falls, the amount of loans increases and investment decreases.
C. The pretax real interest rate rises, the amount of loans decreases and investment decreases.
D. The pretax real interest rate rises, the amount of loans decreases and investment increases.
7. Suppose the pretax real interest rate (r) is 2 percent, the tax rate (μ) is 0.4, and the inflation rate (π) is 8 percent. Calculate the after-tax real interest rate
A. 1.2%
B. 3.2%
C. - 2%
D. - 1.2%
8. What inflation rate would make the after-tax real interest rate equal the pretax real rate (that is, what inflation rate implies = r)?
A. The inflation rate that is equal to the tax rate.
B. The inflation rate that is equal to the pretax real interest rate.
C. The inflation rate that is equal to the after-tax real interest rate.
D. The inflation rate that is equal to the negative of the real pretax interest rate.
9. What is the relationship between deflation and disinflation?
A. Both concepts describe falling inflation rates.
B. Both concepts imply that prices are falling.
C. Deflation means that prices are falling, while disinflation means that the inflation rate is falling.
D. Deflation and disinflation both describe negative inflation rates.
10. Monetary policy is more effective in controlling ____ than in controlling______ because the real interest rate cannot fall below ____ A. inflation; deflation; -π
B. output; inflation, 0
C. inflation; output, 0
D. deflation; output; -π
11. Which event will make a liquidity trap more likely?
A. The central bank decides to push long-run inflation to zero.
B. The neutral real interest rate rises.
C. The government introduces a tax on people's holdings of currency, but not on other assets.
D. None of these events will make a liquidity trap more likely.
Part:2
1. Suppose the neutral real interest rate is 3 percent in country A and 1 percent in country B. What might explain this difference? (Hint: See Chapter 12 Appendix.)
A. Country A has higher levels of investment than country B (other things constant).
B. Country A has lower levels of savings than country B (other things constant).
C. Country A has lower net capital inflows than country B (other things constant).
D. All of the given answers are correct.
2. Suppose an economist has a bright idea: a central bank should lean against the wind when output falls, but not when it rises. That is, policymakers should lower the interest rate below the neutral level when a recession occurs, but not raise it in a boom.What might the effect be of this policy?
A. This policy will result in lower average unemployment rates and temporarily higher inflation.
B. This policy will not have an impact on the unemployment rate, but will lead to a one-time, permanent increase in the inflation rate.
C. This policy will result in lower average unemployment rates and will lead to a permanently increasing inflation rate over time.
D. This policy will not impact the average unemployment rate or the inflation rate.
3. We have assumed that the coefficients in the Taylor rule, ay and aπ, are both positive. Under this assumption, the rule guides the economy back to long-run equilibrium after a shock. The output gap eventually returns to zero, and inflation returns to its long-run level πT. Now suppose the inflation coefficient aπ is still positive but, the output coefficient ay is zero. Does the economy still return to equilibrium with = 0 and π = πT after an expenditure shock?After a supply shock?
A. With ay = zero, the economy will return to = 0 and &piT after an expenditure shock, but not after a supply shock.
B. With ay = zero, the economy will return to = 0 and &piT after a supply shock, but not after an expenditure shock.
C. With ay = zero, the economy will return to = 0 and &piT after anboth expenditure shock and a supply shock.
D. With ay = zero, the economy will not return to = 0 and &piT after any type of shock.
4. Suppose the central bank measures the output gap accurately, but mismeasures the neutral real interest rate. It believes the neutral rate is 1 percent, but the true neutral rate is 3 percent. If the central bank follows a Taylor rule, how does its mistake affect the interest rates it sets and the behavior of output and inflation?
A. The interest rate will be too low, output will be above potential and inflation will be below the target level.
B. The interest rate will be too low, output will be above potential and inflation will be above the target level.
C. The interest rate will be too high, output will be below potential and inflation will be below the target level.
D. The interest rate will be too high, output will be below potential and inflation will be above the target level.
5. Recall the example in Figure 15.6, in which the central bank responds to an expenditure shock. Suppose policymakers know the true slope of the AE curve but mismeasure the shock: they think the curve shifts to the right by 2Δ, twice the actual shift. How will the central bank adjust the interest rate if it wants to keep output at potential? What will really happen to output?
A. The central bank will increase the interest rate by too much. Output will fall below potential output.
B. The central bank will increase the interest rate by too little. Output will increase above potential output.
C. The central bank will increase the interest rate by too little. Output will decrease below potential output.
D. The central bank will increase the interest rate by too much. Output will increase above potential output.
6. Consider a variation on the Taylor rule: r = (0.25)rTAYLOR + (0.75)r(-1) where r is the real interest rate in a quarter, rTAYLOR is the interest rate implied by a Taylor rule, and r(-1) is the interest rate in the previous quarter. Under this rule:
A. During any time period policy changes are smaller than under the basic Taylor rule and the interest rate ends up at a different level than under the basic Taylor rule in the long run.
B. During any time period policy changes are smaller than under the basic Taylor rule and the interest rate ends up at the same level as under the basic Taylor rule in the long run.
C. During any time period policy changes are larger than under the basic Taylor rule and the interest rate ends up at the same level as under the basic Taylor rule in the long run.
D. During any time period policy changes are larger than under the basic Taylor rule and the interest rate ends up at a different level than under the basic Taylor rule in the long run.
7. Which of the following is true about what could the Federal Reserve could have done to prevent the recession in 2008?
A. The Federal Reserve could have increased interest rates before the start of the recession to prevent the housing bubble from forming.
B. The Federal Reserve could not have avoided the recession because it does not have the tools to prevent a housing bubble from developing.
C. The Federal Reserve could not have avoided the recession because it does not have the tools to determine when a housing bubble has developed.
D. All of the given answerscould be true.