Question 1

In the long run,monetary and fiscal policies have no control over
A)the unemployment rate
B)nominal GDP.
C)the inflation rate.
D)the interest rate

Accepted Answer

In the long run, the natural rate of unemployment is determined by structural factors such as technology, demographics, and education levels. While monetary and fiscal policies may have short-term effects on the unemployment rate, they cannot control it in the long run. Nominal GDP, inflation rate, and interest rate are influenced by monetary and fiscal policies to varying degrees, depending on the economic conditions and policy tools used.

Question 2

The believer in policy ________ must be pessimistic about the ability of the private economy to self-stabilize and ________ about the accuracy of economic forecasting.
A)activism,pessimistic
B)activism,optimistic
C)rules,pessimistic
D)rules,optimistic

Accepted Answer

Believers in policy activism think the government must actively intervene to stabilize the economy, which implies skepticism about the private economy's self-stabilization but optimism regarding the government's ability to forecast economic conditions and effectively intervene.

Question 3

Draw two SP curves intersecting LP;call the upper intersection point A and the lower point B.The Fed promises to reduce inflation while maintaining natural unemployment.If the public believes the Fed,the economy moves from ________.Then if the Fed turns out to be time-inconsistent,breaking its promise and trading off ________ inflation for lower unemployment,the public revises the way it forms inflation expectations so that in the long run the economy stays at ________.
A)A to B,lower,B which is superior to A
B)A to B,higher,A which is inferior to B
C)A to B,lower,A which is superior to B
D)B to A,higher,B which is superior to A
E)B to A,lower,B which is inferior to A

Accepted Answer

DIf the public believes the Fed's promise to reduce inflation while maintaining natural unemployment, the economy initially moves from A to B, reflecting the public's adjusted expectations for lower inflation. However, if the Fed is time-inconsistent and opts for lower unemployment at the cost of higher inflation, the public will revise its inflation expectations. In the long run, this leads to a situation where the economy stays at B (D), which is considered superior to A because it reflects a point of higher output or employment, despite the Fed's initial promise aiming for lower inflation (B).

Question 4

In the schematic theory of economic policy,consumer optimism is considered
A)a policy instrument.
B)an exogenous nonpolicy variable.
C)a structural relation.
D)a target variable.
E)an irrelevant side effect.

Accepted Answer

In the schematic theory of economic policy, consumer optimism is considered an exogenous non-policy variable, meaning it is not directly influenced by government policy but instead influenced by external factors such as social and economic conditions.

Question 5

Which of the following is NOT one of the set of assumptions necessary to create the Activists' Paradise?
A)political constraints on the use of policy instruments
B)perfect forecasting of future movements in aggregate demand
C)the absence of costs in changing the policy instruments
D)policy instruments that strongly affect aggregate demand

Accepted Answer

The answer of Which of the following is NOT one...

Question 6

Central banks that are relatively free from political interference,and are thus ________ likely to be time inconsistent,generally have a ________ record of achieving low inflation.
A)more,better
B)more,worse
C)less,better
D)less,worse

Accepted Answer

Central banks with less political interference are less likely to make promises they don't keep (time inconsistency) and typically have a better track record of maintaining low inflation.

Question 7

If the Fed were required to maintain an absolutely constant growth rate of high-powered money,then the growth rate of the money supply
A)would be zero.
B)would be constant at the growth rate of H.
C)would be constant but not necessarily at the growth rate of H.
D)would fluctuate along with the parameters in the money-creation formula.

Accepted Answer

The growth rate of the money supply would fluctuate because it depends on other factors like the reserve ratio and currency ratio, which can change even if the growth rate of high-powered money is constant.

Question 8

Even a monetary policy based on a rigid high-powered money growth rate rule can lack policy credibility,due in part to ________,while a policy that targets the inflation rate itself ________.
A)lags,must have policy credibility by definition
B)lags,can lack credibility due to both lags and multiplier certainty
C)multiplier uncertainty,must have policy credibility by definition
D)multiplier uncertainty,can lack credibility due to both lags and multiplier uncertainty

Accepted Answer

A monetary policy based on a rigid high-powered money growth rate rule can lack policy credibility due to multiplier uncertainty, as the effects of changes in the monetary policy may not be predictable with certainty. On the other hand, a policy that targets the inflation rate itself can still lack credibility due to both lags and multiplier uncertainty.

Question 9

Linking policy instruments to target variables are the
A)indices of economic welfare.
B)structural economic relations.
C)exogenous nonpolicy variables.
D)irrelevant side effects.

Accepted Answer

Policy instruments are designed and implemented to achieve specific target variables, such as economic growth or inflation. Linking these instruments to their target variables involves understanding the structural economic relationships that exist between them. Therefore, option B - structural economic relations - is the best choice. The remaining options do not accurately describe the process of linking policy instruments to target variables.

Question 10

A believer in the need for a CGRR of the money supply policy must be ________ about the ability of the private economy to self-stabilize and ________ about the accuracy of discretionary stabilization policy.
A)optimistic,optimistic
B)optimistic,pessimistic
C)pessimistic,optimistic
D)pessimistic,pessimistic

Accepted Answer

A believer in a constant growth rate rule (CGRR) for the money supply is optimistic about the private economy's ability to self-stabilize and pessimistic about the accuracy of discretionary stabilization policy, preferring rules over discretion.

Question 11

By refusing to be time inconsistent,a central bank is ________ its reputation and ________ "policy credibility."
A)harming,losing
B)harming,gaining
C)investing in,losing
D)investing in,gaining

Accepted Answer

By refusing to be time inconsistent, a central bank is investing in its reputation and gaining "policy credibility." Time consistency refers to the idea that a central bank will follow through on its announced policy actions, which is essential to maintaining credibility and a positive reputation. When a central bank upholds the expectation of time consistency, it is more likely to be trusted by investors and stakeholders, which ultimately strengthens its reputation and credibility. Therefore, the best answer is D.

Question 12

In the past twenty years the economy's responsiveness to monetary policy has become
A)weaker and more stretched out.
B)weaker and shorter.
C)stronger and more stretched out.
D)stronger and shorter.

Accepted Answer

The economy's responsiveness to monetary policy has become weaker and more stretched out over the past twenty years. This is due in part to factors such as increased globalization and financial innovation, which have made it more difficult for central banks to influence economic outcomes through traditional monetary policy tools. Additionally, changes in the structure of the economy and the behavior of households and firms have also contributed to this weakening of the transmission mechanism between monetary policy actions and real economic activity.

Question 13

The Fed has the least degree of discretion and the least to do under a policy rule setting
A)the growth rate of money.
B)the growth rate of high-powered money.
C)the Federal funds rate.
D)nominal GDP.

Accepted Answer

The answer of The Fed has the least degree of...

Question 14

Dividing fiscal policy into two instruments has the effect of introducing another policy target:
A)the interest rate.
B)the national debt.
C)the unemployment rate.
D)the division of output between public and private spending.

Accepted Answer

Dividing fiscal policy into two instruments, namely tax policy and spending policy, creates another policy target, which is the division of output between public and private spending. This is because tax policy affects private spending by changing the disposable income of households, while spending policy affects public spending on goods and services. Therefore, the division of output between public and private spending becomes a relevant policy target alongside other traditional targets such as the unemployment rate and the national debt.

Question 15

In the schematic theory of economic policy,the demand for money is considered
A)a policy instrument.
B)an exogenous nonpolicy variable.
C)a structural relation.
D)a target variable.
E)an irrelevant side effect.

Accepted Answer

The demand for money is considered a structural relation in the schematic theory of economic policy, as it describes how economic agents' behavior (e.g., their demand for liquidity) is influenced by various factors such as interest rates and income levels.

Question 16

Suppose that the central bank operates under a money supply growth rule,but with changes in the unemployment rate automatically adjusting the money growth target.This is called a ________ rule.
A)CGRR
B)discretionary
C)feedback
D)nominally-anchored

Accepted Answer

A feedback rule adjusts the monetary policy target based on changes in economic variables such as the unemployment rate. This type of rule allows for some discretion in policy decisions, but also incorporates automatic adjustments to maintain economic stability.

Question 17

The economy has been compared to a supertanker on the ocean to make the point that
A)the larger the economy,the less it is influenced by other economies (the weather).
B)it takes time for a policy change to overcome the economy's momentum and change its direction (as in steering an immense ship).
C)a random shock affects all parts of the economy in the same way (as all of a ship rises or falls together with the waves).
D)the larger the economy,the worse it is for the rest of the world when it goes into a recession (there is enough oil in a supertanker for a spill to stretch across the ocean).

Accepted Answer

Comparing the economy to a supertanker on the ocean conveys the idea that like a supertanker, the economy is massive, has significant momentum, and takes time to change direction. Policy changes also take time to take effect, and it is challenging to stop or reverse the economy's course once it's moving in a particular direction. Therefore, option B is the best choice. Options A, C, and D are incorrect because they do not accurately reflect the analogy made between the economy and a supertanker.

Question 18

The "time inconsistency" argument is that a downward shift of the short-run Phillips Curve,which comes about with a ________ of inflationary expectations,is more likely when monetary policy ________.
A)lowering,follows a rigid rule
B)lowering,is at the discretion of policymakers
C)raising,follows a rigid rule
D)raising,is at the discretion of policymakers

Accepted Answer

A downward shift of the short-run Phillips Curve, which indicates lower inflationary expectations, is more likely when monetary policy follows a rigid rule, as it provides consistent and predictable policy actions that help anchor expectations.

Question 19

In Gordon's early presentation of the IS-LM and AD/SRAS/LRAS models,macro policy was assumed to have ________ effects on aggregate demand.
A)immediate and certain
B)immediate but uncertain
C)delayed but certain
D)delayed and uncertain

Accepted Answer

In Gordon's early presentation, macro policy was assumed to have immediate and certain effects on aggregate demand, reflecting a more classical view of economic policy effectiveness.

Question 20

In the Activists' Paradise,to increase real GDP without affecting the interest rate,it is necessary to change
A)only fiscal policy and shift the IS curve.
B)only monetary policy and shift the LM curve.
C)fiscal and monetary policies and shift both IS and LM.
D)more policy instruments than policymakers are actually able to manipulate.

Accepted Answer

To increase real GDP without affecting the interest rate, both fiscal and monetary policies need to be adjusted. Fiscal policy can shift the IS curve to increase GDP, while monetary policy can shift the LM curve to keep the interest rate unchanged. This coordinated approach ensures that the increase in GDP does not come with an increase in interest rates.

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

In the long run,monetary and fiscal policies have no control over

The believer in policy must be pessimistic about the ability of the private economy to self-stabilize and about the accuracy of economic forecasting.

In the schematic theory of economic policy,consumer optimism is considered

Which of the following is NOT one of the set of assumptions necessary to create the Activists' Paradise?

Central banks that are relatively free from political interference,and are thus likely to be time inconsistent,generally have a record of achieving low inflation.

If the Fed were required to maintain an absolutely constant growth rate of high-powered money,then the growth rate of the money supply

Even a monetary policy based on a rigid high-powered money growth rate rule can lack policy credibility,due in part to ,while a policy that targets the inflation rate itself .

Linking policy instruments to target variables are the

A believer in the need for a CGRR of the money supply policy must be about the ability of the private economy to self-stabilize and about the accuracy of discretionary stabilization policy.

By refusing to be time inconsistent,a central bank is its reputation and "policy credibility."

In the past twenty years the economy's responsiveness to monetary policy has become

The Fed has the least degree of discretion and the least to do under a policy rule setting

Dividing fiscal policy into two instruments has the effect of introducing another policy target:

In the schematic theory of economic policy,the demand for money is considered

Suppose that the central bank operates under a money supply growth rule,but with changes in the unemployment rate automatically adjusting the money growth target.This is called a ________ rule.

The economy has been compared to a supertanker on the ocean to make the point that

The "time inconsistency" argument is that a downward shift of the short-run Phillips Curve,which comes about with a of inflationary expectations,is more likely when monetary policy .

In Gordon's early presentation of the IS-LM and AD/SRAS/LRAS models,macro policy was assumed to have ________ effects on aggregate demand.

In the Activists' Paradise,to increase real GDP without affecting the interest rate,it is necessary to change