Question 1

Monetary authorities in a country face the following situation: Consumers are not spending, investment is low, and unemployment is relatively high. Explain how monetary policy could work to improve this situation.

Accepted Answer

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Question 2

A nominal GDP rule requires the Fed to keep Mv constant.

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Question 3

A nominal GDP rule requires the Fed to keep the growth rate of M constant.

Accepted Answer

A nominal GDP rule requires the Fed to keep the growth rate of nominal GDP constant, not the growth rate of M (the money supply).

Question 4

If the Fed reverses course and attempts to reduce inflation, it must be willing to accept lower growth as a consequence.

Accepted Answer

In order to reduce inflation, the Fed must tighten monetary policy which can result in lower growth as it can reduce consumer and business spending.

Question 5

Bubbles in asset markets are usually easy to identify.

Accepted Answer

Bubbles in asset markets are often difficult to identify until after they have burst or resulted in a significant downturn in the market. This is because they involve speculation and enthusiasm fueled by investor behavior and market sentiment, rather than fundamental factors such as the underlying value of the asset.

Question 6

What is a "disinflation" policy? What dilemma does it present for the Fed?

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Question 7

Using monetary policy to deal with aggregate demand shocks is much easier in theory than in practice. Describe three major difficulties that a central bank might face.

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Question 8

Easy credit can start or intensify a housing bubble.

Accepted Answer

Easy credit can allow more people to afford to buy a home, increasing demand and driving up prices. This can create a housing bubble, where prices increase beyond sustainable levels and are not supported by the underlying factors, such as income or economic growth. When the bubble bursts, it can lead to a housing market crash and financial instability.

Question 9

When it is difficult to know the size and timing of monetary policy effects, the central bank should use policy discretion to deal with shocks.

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Question 10

If the Federal Reserve responds to shocks too often in the wrong direction or with the wrong strength, GDP will increase rather than decrease.

Accepted Answer

If the Federal Reserve responds to shocks too often in the wrong direction or with the wrong strength, it can lead to economic instability and potentially harm GDP growth.

Question 11

Suppose the spending habits of consumers suddenly change so that consumption growth increases. What should the central bank do to restore the economy back to the old equilibrium point? Explain your answer with the aid of an AD-AS diagram.

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Question 12

The housing boom of the 2000s is an example of a negative real shock.

Accepted Answer

The housing boom of the 2000s is more accurately described as a positive demand shock in the housing market, driven by factors like low interest rates and easy credit, rather than a negative real shock which would imply a reduction in the economy's ability to produce goods and services.

Question 13

A nominal GDP rule requires the Fed to adjust money growth enough to offset changes in velocity.

Accepted Answer

The nominal GDP rule, also known as the Taylor rule, suggests that the Fed should adjust the federal funds rate (interest rates) according to changes in the inflation rate and the output gap (difference between actual output and potential output). However, some proponents of the nominal GDP rule argue that the Fed should also consider changes in velocity (how quickly money is circulating in the economy) as a factor in its monetary policy decisions.

Question 14

A constant money growth rule requires the Fed to ignore changes in velocity.

Accepted Answer

A constant money growth rule means that the Fed sets a target rate for the growth of the money supply, regardless of changes in velocity (the speed at which money changes hands in the economy). The Fed does not actively try to manipulate velocity under this rule.

Question 15

Monetary policy is easy if the central bank sticks to a few simple rules of thumb.

Accepted Answer

While there are some general principles that can guide monetary policy, such as maintaining price stability and promoting economic growth, implementing effective monetary policy is not a simple or straightforward task. It requires a deep understanding of the economy, flexibility to adapt to changing conditions, and careful use of a variety of tools and strategies.

Question 16

The supporters of discretionary monetary policy want to see the course of the economy guided by certain targets.

Accepted Answer

Supporters of discretionary monetary policy advocate for the flexibility to adjust monetary policy as economic conditions change, rather than strictly following predetermined targets or rules.

Question 17

Explain the role of "expectations" and "credibility" in monetary policy when the policy goal is fighting inflation and keeping it low.

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Question 18

Briefly explain why monetary policy cannot beat both inflation and unemployment at the same time.

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Question 19

Monetary authorities in a country say that there have been no recent negative supply shocks. The economy in this country is currently experiencing high inflation and its productive capacity cannot be increased much. Explain how monetary policy could work to address this scenario. Are there any negative consequences of your recommended policy?

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Question 20

What is the appropriate monetary policy in response to a positive demand shock that leaves the economy operating above its long-run potential growth rate?

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Quiz 16: Monetary Policy