Deck 36: 3: Sec 363 Mc Should Monetary Policy Be Made by Rule Rather Than by Discretion

Question 1

Which of the following support the idea that monetary policy should be made by a rule?

A)the political business cycle and the time-inconsistency problem
B)the political business cycle but not the time-inconsistency problem
C)the time-inconsistency problem,but not the political business cycle
D)neither the political business cycle nor the time-inconsistency problem

Answer 1

D

Question 2

A 1977 amendment to the Federal Reserve Act of 1913

A)requires the Federal Reserve to place more weight on promoting price stability than on promoting maximum employment.
B)requires the Federal Reserve to place more weight on promoting maximum employment than on promoting price stability.
C)requires the Federal Reserve to place equal weight on promoting price stability and maximum employment.
D)says the Federal Reserve should promote price stability and maximum employment,but does not specify how the Federal Reserve should weight these goals.

Answer 2

C

Question 3

A 1977 amendment to the Federal Reserve Act of 1913 says the Fed should "promote" which of the following goals?

A)only price stability
B)only maximum employment
C)only price stability and maximum employment
D)price stability,maximum employment,and moderate long-term interest rates

Answer 3

B

Question 4

The time inconsistency of policy implies that

A)what policymakers say they will do is generally what they will do,but people don't believe them because of current policy.
B)when people expect that inflation will be low,it is harder for the Fed to increase output by increasing the money supply.
C)people will believe Fed policy will be more inflationary than the Fed claims.
D)what policymakers say they will do is usually not what they do,but people believe them anyway.

Question 5

According to the political business cycle theory,if the Fed wanted to see a President re-elected,prior to the election it might

A)buy bonds to raise interest rates.
B)buy bonds to reduce interest rates.
C)sell bonds to raise interest rates.
D)sell bonds to reduce interest rates.

Question 6

The time inconsistency of monetary policy means that

A)once people have formed expectations of low inflation based on a promise by the central bank,the central bank is tempted to raise inflation to lower unemployment.
B)at some times central banks think it is more important to keep unemployment low;at other times,they think it is more important to keep inflation low.
C)monetary policy is not consistent across time because it is influenced by politics.
D)monetary policy is not consistent across time because policymakers are incompetent.

Question 7

A 1977 amendment to the Federal Reserve Act of 1913

A)says the Federal Reserve should only promote maximum employment
B)says the Federal Reserve should only promote price stability
C)says the Federal Reserve should promote price stability and maximum employment,but does not specify how the Federal Reserve should weight these goals.
D)says the Federal Reserve should promote price stability and maximum employment,but specifies that it place more weight on promoting price stability.

Question 8

According to the political business cycle theory,if the Fed wanted to see a President re-elected,prior to the election it might

A)lower the discount rate and sell bonds.
B)lower the discount rate and buy bonds.
C)raise the discount rate and sell bonds.
D)raise the discount rate and buy bonds.

Question 9

The Federal Open Market Committee

A)by law must focus on maintaining low inflation rather than stabilizing output.
B)by law must focus on stabilizing output rather than maintaining low inflation.
C)by law must follow a mechanical rule that takes into account deviations of unemployment from its natural rate and deviations of inflation from a target.
D)operates with almost complete discretion over monetary policy.

Question 10

The political business cycle refers to

A)the fact that about every four years some politician advocates greater government control of the Fed.
B)the potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected.
C)the part of the business cycle caused by the reluctance of politicians to smooth the business cycle.
D)changes in output created by the monetary rule the Fed must follow.

Question 11

If there is a political business cycle and the Federal Reserve supports the incumbent,then we should expect that prior to elections

A)interest rates and output would rise.
B)interest rates would rise and output would fall.
C)interest rates would fall and output would rise.
D)interest rates and output would fall.

Question 12

The time inconsistency of policy implies that

A)what policymakers say they will do is generally what they will do,but people don't believe them because of current policy.
B)when people expect that inflation will be low,it is easier for the Fed to increase output by increasing the money supply.
C)people will believe Fed policy will be less inflationary than the Fed claims.
D)what policymakers say they will do is usually not what they do,but people believe them anyway.

Question 13

The Federal Open Market Committee meets about

A)every six days.
B)every six weeks.
C)every six months.
D)every sixteen months.

Question 14

When the Federal Open Market Committee meets it

A)looks only at the state of economy to determine how to conduct monetary operations in order to follow the monetary policy rule set by law.
B)looks at the state of the economy and economic forecasts to determine how to conduct monetary operations in order to follow the monetary policy rule set by law.
C)looks only at the state of the economy to determine the target it will set for the federal funds rate.
D)looks at the state of the economy and economic forecasts to determine the target it will set for the federal funds rate.

Question 15

The Federal Open Market Committee

A)must submit its policies to the President and Senate for approval.
B)operates with almost complete discretion over monetary policy.
C)is required to target short-term interest rates in a mechanical way based on an equation that takes into account both price stability and output fluctuations.
D)is required to set and publicize targets for money supply growth.

Question 16

If a government managed to reduce the time inconsistency problem by mandating that the central bank target inflation at a low rate,then

A)the long-run Phillips curve would shift right.
B)the long-run Phillips curve would shift left.
C)the short-run Phillips curve would shift up.
D)the short-run Phillips curve would shift down.

Question 17

The Federal Open Market Committee

A)operates with almost complete discretion over monetary policy.
B)is required to increase the money supply by a given growth rate each year.
C)is required to keep short-term interest rates within a range set by Congress.
D)is required by its charter to change the money supply using a complex formula that concerns the tradeoff between inflation and unemployment.

Question 18

If there is a political business cycle and the Federal Reserve supports the incumbent,then we should expect that prior to elections the Fed would

A)raise interest rates to shift aggregate demand left.
B)raise interest rates to shift aggregate demand right.
C)reduce interest rates to shift aggregate demand left.
D)reduce interest rates to shift aggregate demand right.

Question 19

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004.One of their contributions was to argue that if a central bank could convince people to expect zero inflation,then the Fed would be tempted to raise output by increasing inflation.This possibility is known as

A)inflation targeting.
B)the monetary policy reaction lag.
C)the time inconsistency of policy.
D)the sacrifice ratio dilemma.

Question 20

Time inconsistency will cause the

A)short-run Phillips curve to be higher than otherwise.
B)short-run Phillips curve to be lower the otherwise.
C)long-run Phillips curve to be farther to the right than otherwise.
D)long-run Phillips curve to be farther left than otherwise.

Question 21

According to the political business cycle,after an election,unless the central bank acts inflation is likely to

A)have risen.To counter this the central bank would raise interest rates.
B)have risen.To counter this the central bank would lower interest rates.
C)have fallen.To counter this the central bank would raise interest rates.
D)have fallen.To counter this the central bank would lower interest rates.

Question 22

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises.If the economy starts from long-run equilibrium and aggregate supply shifts left,the central bank must

A)decrease the money supply,which will move output back towards its long-run level.
B)decrease the money supply,which will move output farther from its long-run level.
C)increase the money supply,which will move output back towards its long-run level.
D)increase the money supply,which will move output farther from its long-run level.

Question 23

Paul Volcker,former chair of the Fed,implemented

A)contractionary policy which increased the popularity of the U.S.president who had appointed him.
B)contractionary policy which decreased the popularity of the U.S.president who had appointed him.
C)expansionary policy which increased the popularity of the U.S.president who had appointed him.
D)expansionary policy which decreased the popularity of the U.S.president who had appointed him.

Question 24

Assume a central bank follows a rule that requires it to take steps to keep the price level constant.If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged,then

A)the central bank would have to raise interest rates which would decrease output.
B)the central bank would have to raise interest rates which would increase output.
C)the central bank would have to reduce interest rates which would decrease output.
D)the central bank would have to reduce interest rates which would increase output.

Question 25

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises.If the economy starts from long-run equilibrium and aggregate supply shifts left,the central bank must

A)decrease the money supply so interest rates rise.
B)decrease the money supply so interest rates fall.
C)increase the money supply so interest rates rise.
D)increase the money supply so interest rates fall.

Question 26

Assume a central bank follows a rule that requires it to take steps to keep the price level constant.If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged,then

A)the central bank would have to decrease the money supply which would decrease output.
B)the central bank would have to decrease the money supply which would increase output.
C)the central bank would have to increase the money supply which would decrease output.
D)the central bank would have to increase the money supply which would increase output.

Question 27

A law that requires the money supply to grow by a fixed percentage each year would eliminate

A)the time inconsistency problem,but not political business cycles.
B)the political business cycle,but not the time inconsistency problem.
C)both the time inconsistency problem and political business cycles.
D)neither the time inconsistency problem nor political business cycles.

Question 28

If a central bank had to give up its discretion and follow a rule that required it to keep inflation low,

A)the short-run Phillips curve would shift up.
B)the short-run Phillips curve would shift down.
C)the long-run Phillips curve would shift right.
D)the long-run Phillips curve would shift left.

Question 29

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises.If the economy starts from long-run equilibrium and aggregate demand shifts right,the central bank must

A)decrease the money supply,which will move output back towards its long-run level.
B)decrease the money supply,which will move output farther from its long-run level.
C)increase the money supply,which will move output back towards its long-run level.
D)increase the money supply,which will move output farther from its long-run level.

Question 30

If people in countries that have had persistently high inflation are skeptical about efforts to reduce inflation,the short-run Phillips curve will remain far to the

A)left,and the sacrifice ratio will be low.
B)left,and the sacrifice ratio will be high.
C)right,and the sacrifice ratio will be low.
D)right,and the sacrifice ratio will be high.

Question 31

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises.If the economy starts from long-run equilibrium and aggregate demand shifts right,the central bank must

A)decrease the money supply,which shifts aggregate demand further right.
B)decrease the money supply,which shifts aggregate demand left.
C)increase the money supply,which shifts aggregate demand further right.
D)increase the money supply,which shifts aggregate demand left.

Question 32

As it is usually practiced,inflation targeting sets

A)a specific inflation rate for the central bank to target and prohibits it from deviating from the target even when some shock pushes inflation away from that number.
B)a specific inflation rate for the central bank to target but allows it to deviate from the target when some shock pushes inflation away from that number.
C)sets some range of inflation rates for the central bank to target and prohibits it from deviating from that range even when some shock pushes inflation outside the range.
D)sets some range of inflation rates for the central bank to target but allows it to deviate from that range when some shock pushes inflation outside the range.

Question 33

Some people believe that monetary policy should be made by rule rather than by discretion.One of their beliefs is that

A)setting a policy rule will limit the abuse of power of policymakers.
B)policymakers can better influence the political business cycle in their favor when following a policy rule.
C)a policy rule provides policymakers with the greatest flexibility to manage inflation.
D)if the Fed was required to follow a low-inflation policy,the economy would face a less favorable short-run trade-off between inflation and unemployment.

Question 34

Who did President Jimmy Carter appoint to head the Federal Reserve beginning in 1979?

A)Ben Bernanke
B)Alan Greenspan
C)Paul Volcker
D)Arthur Burns

Question 35

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices.If the economy starts at long-run equilibrium and then aggregate supply shifts right,the central bank would have to

A)increase the money supply,which causes output to move closer to its long-run equilibrium.
B)increase the money supply,which causes output to move farther from long-run equilibrium.
C)decrease the money supply,which causes output to move closer to its long-run equilibrium.
D)decrease the money supply,which causes output to move farther from long-run equilibrium.

Question 36

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises.If the economy starts from long-run equilibrium and aggregate demand shifts right,the central bank must

A)increase the money supply so interest rates rise.
B)increase the money supply so interest rates fall.
C)decrease the money supply so interest rates rise.
D)decrease the moneys supply so interest rates fall

Question 37

Assume a central bank follows a rule that requires it to take steps to keep the price level constant.If the price level rose because of an increase in aggregate demand and a decrease in aggregate supply that kept output unchanged,then

A)the central bank would have to decrease the money supply which would decrease output.
B)the central bank would have to decrease the money supply which would increase output.
C)the central bank would have to increase the money supply which would decrease output.
D)the central bank would have to increase the money supply which would increase output.