Question 1

One of the drawbacks of rules based monetary policy is ________.

Accepted Answer

A)   they do not incorporate the judgment of monetary policy makers
B)   they are too complicated for the general public to understand
C)   these types of programs are difficult to implement in practice
D)   none of the aboveE) C) and D)
F) All of the above

Question 2

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible, then ________.

Accepted Answer

A)   the public's expected inflation will remain unchanged
B)   the short-run aggregate supply curve will rise
C)   economic contraction will be worse
D)   all of the above
E)   B and C onlyF) A) and C)
G) C) and D)

Question 3

The global economic crisis that arose in October 2008 was the result of ________.

Accepted Answer

A)   higher oil prices
B)   the collapse of the subprime mortgage market
C)   the European debt crisis
D)   fiscal and monetary issues stemming from the US debt ceilingE) None of the above
F) All of the above

Question 4

The difference in outcomes occurring with a credible nominal anchor and without one, given a negative aggregate supply shock is that ________.

Accepted Answer

A)   the overall economic outlook is better
B)   there is no difference but credibility provides national security
C)   without credible policy, inflation will continue to spiral upwards
D)   with credible policy, the aggregate supply curve shifts back quicklyE) A) and B)
F) C) and D)

Question 5

Advocates of nondiscretionary policy contend that a discretionary policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output.

Accepted Answer

A)   supply; less
B)   supply; more
C)   demand; less
D)   demand; moreE) A) and B)
F) A) and C)

Question 6

Suppose that there is a negative aggregate supply shock and the central bank commits to an inflation rate target.

Accepted Answer

A)   If the commitment is credible, the public's expected inflation will remain unchanged.
B)   Credible policy produces better outcomes on both inflation and output in the short run.
C)   Policies that are not credible produce worse economic contraction.
D)   all of the above.
E)   A and C only.F) C) and E)
G) A) and B)

Question 7

Explain the difference in how the Canadian economy responding during the three oil shocks and the role monetary policy credibility played.

Accepted Answer

Three oil shocks occurred in 1973, 1979 ...

Question 8

Monetarists ________.

Accepted Answer

A)   see wages as being sufficiently sticky so that the wage and price adjustment process is reasonably slow
B)   are skeptical of the need for active government policies to restore the economy to full employment
C)   argue for active government policy to restore the economy to full employment when unemployment is high
D)   A and B onlyE) All of the above
F) C) and D)

Question 9

Empirical evidence on the importance of credibility in dealing with inflation includes experience from countries such as ________.

Accepted Answer

A)   Bolivia
B)   Argentina
C)   Zimbabwe
D)   BrazilE) A) and B)
F) A) and C)

Question 10

In August 1985, the Bolivian government announced ________.

Accepted Answer

A)   it would no longer pay government employees with money
B)   the New Economic Policy
C)   a credible nominal anchor
D)   a change in the head of stateE) C) and D)
F) B) and D)

Question 11

Which of the following views are consistent with the case for nondiscretionary macroeconomic policy?

Accepted Answer

A)   Even with time lags, discretionary policy moves the economy to full employment before the economy's self-correcting mechanism would.
B)   The wage and price adjustment process being extremely slow, a nondiscretionary policy results in a large loss of output.
C)   Workers will come to expect expansionary policies whenever the economy moves below full employment.
D)   A discretionary, accommodating policy of shifting the aggregate demand curve will produce less volatility in both the price level and output due to the short time it takes to shift aggregate demand.E) B) and D)
F) B) and C)

Question 12

The U.S. government can play an important role in establishing the credibility of anti-inflation policy by ________.

Accepted Answer

A)   demonstrating fiscal responsibility
B)   monitoring the Fed
C)   conducting fiscal policy
D)   all of the aboveE) A) and B)
F) A) and C) A

Question 13

A credible, nonaccommodating policy rule has the ________ that it makes a cost-push by workers ________ likely and thus helps to reduce the output loss from controlling inflation.

Accepted Answer

A)   advantage; less
B)   advantage; more
C)   disadvantage; less
D)   disadvantage; moreE) A) and B)
F) All of the above

Question 14

Arguments for adopting a policy rule include ________.

Accepted Answer

A)   discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect
B)   discretion enables policy makers to change policy settings when an economy undergoes structural changes
C)   discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run
D)   all of the aboveE) B) and D)
F) B) and C) C

Question 15

The Bank of Canada has not always had a reputation for garnering credibility. These include countervailing monetary policies in ________.

Accepted Answer

A)   early 1970s
B)   early 1960s
C)   the course of the Coyne affair
D)   during the global financial crisisE) B) and C)
F) A) and C)

Question 16

The difference in outcomes occurring with a credible nominal anchor and without one, given a negative aggregate demand shock is that ________.

Accepted Answer

A)   with the credible policy there is no shift in the aggregate supply curve
B)   there is no difference but credibility provides national security
C)   without credible policy, inflation will continue to spiral upwards
D)   with credible policy, the aggregate supply curve shifts back quicklyE) A) and B)
F) A) and C)

Question 17

A positive aggregate demand shock will only impact ________.

Accepted Answer

A)   the equilibrium output
B)   the equilibrium inflation rate
C)   the short run aggregate supply curve
D)   none of the aboveE) A) and D)
F) B) and C)

Question 18

The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for ________ policy.

Accepted Answer

A)   supply-side
B)   nondiscretionary
C)   discretionary
D)   demand-managementE) None of the above
F) B) and C) B

Question 19

Operating with discretion in a monetary policy sense implies ________.

Accepted Answer

A)   making no commitment to future actions
B)   a constant growth rate rule
C)   introducing a zero inflation rule
D)   making decisions without regulatory oversightE) None of the above
F) A) and D)

Question 20

Provide several ways that the central bank could establish credibility.

Accepted Answer

Some ways in which the central bank coul...

Exam 25: The Role of Expectations in Monetary Policy

One of the drawbacks of rules based monetary policy is ________.

Correct AnswerverifiedShow Answer

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible, then ________.

Correct AnswerverifiedShow Answer

The global economic crisis that arose in October 2008 was the result of ________.

Correct AnswerverifiedShow Answer

The difference in outcomes occurring with a credible nominal anchor and without one, given a negative aggregate supply shock is that ________.

Correct AnswerverifiedShow Answer

Advocates of nondiscretionary policy contend that a discretionary policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output.

Correct AnswerverifiedShow Answer

Suppose that there is a negative aggregate supply shock and the central bank commits to an inflation rate target.

Correct AnswerverifiedShow Answer

Explain the difference in how the Canadian economy responding during the three oil shocks and the role monetary policy credibility played.

Correct AnswerverifiedThree oil shocks occurred in 1973, 1979 ...View AnswerShow Answer

Monetarists ________.

Correct AnswerverifiedShow Answer

Empirical evidence on the importance of credibility in dealing with inflation includes experience from countries such as ________.

Correct AnswerverifiedShow Answer

In August 1985, the Bolivian government announced ________.

Correct AnswerverifiedShow Answer

Which of the following views are consistent with the case for nondiscretionary macroeconomic policy?

Correct AnswerverifiedShow Answer

The U.S. government can play an important role in establishing the credibility of anti-inflation policy by ________.

Correct AnswerverifiedA

A credible, nonaccommodating policy rule has the ________ that it makes a cost-push by workers ________ likely and thus helps to reduce the output loss from controlling inflation.

Correct AnswerverifiedShow Answer

Arguments for adopting a policy rule include ________.

Correct AnswerverifiedC

The Bank of Canada has not always had a reputation for garnering credibility. These include countervailing monetary policies in ________.

Correct AnswerverifiedShow Answer

The difference in outcomes occurring with a credible nominal anchor and without one, given a negative aggregate demand shock is that ________.

Correct AnswerverifiedShow Answer

A positive aggregate demand shock will only impact ________.

Correct AnswerverifiedShow Answer

The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for ________ policy.

Correct AnswerverifiedB

Operating with discretion in a monetary policy sense implies ________.

Correct AnswerverifiedShow Answer

Provide several ways that the central bank could establish credibility.

Correct AnswerverifiedSome ways in which the central bank coul...View AnswerShow Answer

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Advocates of nondiscretionary policy contend that a discretionary policy of shifting the aggregate curve will be costly because it produces volatility in both the price level and output.

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Three oil shocks occurred in 1973, 1979 ...
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A

A credible, nonaccommodating policy rule has the that it makes a cost-push by workers likely and thus helps to reduce the output loss from controlling inflation.

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C

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B

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Some ways in which the central bank coul...
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