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| 1 | |
Currently the U.S. Fed tries to influence economic activity |
| | A) | only in the long run by shifting aggregate supply |
| | B) | mostly in the short run by shifting aggregate demand |
| | C) | by establishing a clear inflation target at all times |
| | D) | by following a strict monetary growth rule |
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| 2 | |
Which of the following is NOT a way a central bank conducts monetary policy? |
| | A) | setting interest rates at a certain desired level |
| | B) | buying or selling of government bonds |
| | C) | trying to increase aggregate supply by lowering interest rates |
| | D) | adjusting its policies frequently after an initial policy change has been made and feedback of its effect has been received |
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| 3 | |
The short-run goals of a central bank are to keep economic activity high while keeping inflation low; however, |
| | A) | there is an inherent conflict between these goals |
| | B) | in the long run the central bank can only affect inflation |
| | C) | if the central bank lowers interest rates, economic activity is only temporarily increased |
| | D) | all of the above |
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| 4 | |
A central bank can stimulate economic activity |
| | A) | by strictly enforcing a specified inflation target |
| | B) | by massively selling government bonds |
| | C) | by shifting aggregate supply to the right through monetary expansion |
| | D) | only temporarily and at the cost of a higher price level in the future |
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| 5 | |
The U.S. Federal Reserve’s Open Market Committee |
| | A) | sets the target for the federal funds rate by vote |
| | B) | often signals its intentions to avoid upsetting financial markets |
| | C) | meets every six weeks |
| | D) | all of the above |
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| 6 | |
The Fed’s most likely response to an increase in the inflation rate is to |
| | A) | wait and see what happens next |
| | B) | lower interest rates in an effort to stimulate aggregate supply |
| | C) | increase short-term interest rates by selling Treasury bills |
| | D) | buy government bonds from banks to decrease their reserves |
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| 7 | |
When making a policy change, the U.S. Fed generally announces a target for the interest rate that banks charge each other for loans, |
| | A) | which is called the federal funds rate |
| | B) | which is called the discount rate |
| | C) | but then often surprises financial markets by actually setting a different target |
| | D) | since a change in the interest rate is the most effective way to shift aggregate supply |
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| 8 | |
If a central bank is uncertain about whether an economic disturbance is temporary or permanent, or whether a policy response is likely to achieve a previously stated goal, |
| | A) | any policy change should be modest in nature |
| | B) | no policy change should be undertaken until the full effect of the disturbance is clear |
| | C) | short-run stabilization of economic activity should be left up to the administration and its fiscal policies |
| | D) | it should not announce its policy target in advance so financial markets will not overreact |
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| 9 | |
A central bank that follows pure inflation targeting |
| | A) | should raise interest rates whenever the output gap shrinks |
| | B) | should never adjust interest rates |
| | C) | cannot look to the Taylor rule as a guide for setting interest rates |
| | D) | none of the above |
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| 10 | |
According to the Taylor rule, a central bank should always set interest rates |
| | A) | in response to changes in the inflation rate |
| | B) | in response to changes in the output gap |
| | C) | in response to changes in both the output gap and the inflation rate |
| | D) | at 2% in real terms |
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| 11 | |
The Fed can most effectively achieve a federal funds rate target by |
| | A) | maintaining a specified target for monetary growth |
| | B) | lowering the discount rate whenever the output gap decreases |
| | C) | buying or selling Treasury bills |
| | D) | withholding information about the desired target rate from financial markets |
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| 12 | |
The Taylor rule is an activist monetary policy rule that |
| | A) | is also known as the monetary growth rule |
| | B) | dictates a decrease in interest rates in response to a higher output level |
| | C) | can involve inflation targeting if the inflation coefficient is equal to 1 |
| | D) | helps a central bank in setting its target interest rates based on current economic conditions |
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| 13 | |
If a central bank wants to slow down economic activity it should |
| | A) | raise interest rates to reduce investment spending and shift aggregate supply to the left |
| | B) | buy Treasury bills from banks to affect bank reserves and therefore interest rates |
| | C) | conduct open market sales to lower spending on durable consumption and investment |
| | D) | be aware that the long run effect may be a permanent decrease in the level of potential GDP |
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| 14 | |
An activist monetary policy rule |
| | A) | only works if financial markets are made aware in advance of the central bank’s actions |
| | B) | focuses only on the long run |
| | C) | most often involves policy actions designed to keep interest rates stable |
| | D) | none of the above |
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| 15 | |
Which of the following equations most accurately describes the Taylor rule? |
| | A) | πt = mt - yt + vt |
| | B) | πt = mt + yt - vt |
| | C) | mt = 0.04 + 2(ut - 0.055) |
| | D) | it = 2 + πt + 0.5(πt -π*t) + 0.5[100(Yt - Y*t)/Y*t] |
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| 16 | |
The Taylor rule |
| | A) | is an activist monetary policy rule |
| | B) | suggests that the monetary growth rate should be decreased by 1% for every 1.5% increase in inflation |
| | C) | suggests that real interest rates should be increased by 0.5% for every 1% increase in inflation |
| | D) | all of the above |
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| 17 | |
According to the Taylor rule, if the current inflation rate is 4.2%, output is 1.2% below the full-employment level, and the central bank’s announced inflation target is 3%, at what level should the central bank set the nominal interest rate? |
| | A) | 3% |
| | B) | 4.2% |
| | C) | 5.4% |
| | D) | 6.2% |
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| 18 | |
According to the Taylor rule, if the current inflation rate is 2.8%, output is 1% above the full-employment level, and the central bank’s announced inflation target is 2%, at what level should the central bank set the nominal interest rate? |
| | A) | 5.7% |
| | B) | 4.8% |
| | C) | 3.8% |
| | D) | 1.2% |
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| 19 | |
The Taylor rule |
| | A) | is an example of an open-loop control system |
| | B) | is an example of a closed-loop control system |
| | C) | suggests how a central bank should change the money growth rate in response to a change in the inflation rate |
| | D) | both A and C |
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| 20 | |
A closed-loop control system |
| | A) | requires a central bank to adhere to an announced policy target |
| | B) | requires no feedback since control variables are set only once and then adhered to |
| | C) | generally involves feedback and frequent modest adjustments |
| | D) | has no practical application unless feedback is instantaneous |
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