Quiz 546

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Quiz 545

1. The Federal Open Market Committee meets about

a. every six days.
b. every six weeks.
c. every six months.
d. every sixteen months.

2. 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.

3. 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.

4. 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
5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.
23. 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.

24. 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.

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 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.

26. 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

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

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.
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

35. 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.

36. Which of the following is correct? In the 1990’s

a. the Fed maintained low inflation because it had to follow a policy rule.
b. the Fed maintained low inflation even without being required to follow a policy rule.
c. the Fed was not required to follow a policy rule and let inflation move higher.
d. the Fed was required to follow a policy rule, but it provided the Fed enough discretion that
inflation moved higher.

37. An opponent of monetary policy decisions by rule would point to which of the following as
support of his case?
a. time inconsistency of policy
b. flexibility to confront unforeseen circumstances
c. political business cycle
d. the ability to craft rules that account for all possible contingencies in advance

38. Which of the following is an important advantage of discretionary monetary policy?

a. Influencing the political business cycle
b. Flexibility to deal with changing economic conditions
c. Limiting the opportunities for abuse of power by policymakers
d. Avoiding the time inconsistency of policy problem

39. 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.

40. 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.