The many common an interpretation that monetary policymakers use for price stability is

A) low and also stable deflation. B) one inflation rate of zero percent. C) high and also stable inflation. D) low and stable inflation.

Inflation results in

A) lull of planning because that the future. B) ease of comparing prices over time. C) reduced nominal interest rates. D) difficulty interpreting family member price movements.

Economists believe that nations recently enduring hyperinflation have actually experienced

A) diminished growth. B) increased growth. C) reduced prices. D) reduced interest rates.

A nominal variable, such as the inflation price or the money supply, which ties down the price level to attain price security is called ________ anchor.

You are watching: The most common definition that monetary policymakers use for price stability is

A) a nominal B) a real C) an operation D) an intermediary

A central feature of monetary policy tactics in all countries is the use of a nominal change that financial policymakers use as an intermediary target to attain an ultimate score such together price stability. Together a change is referred to as a nominal

A) anchor. B) benchmark. C) tether. D) guideline.

A in the name of anchor promotes price security by

A) outlawing inflation. B) stabilizing interest rates. C) maintaining inflation expectation low. D) keeping economic growth low.

Monetary plan is taken into consideration time-inconsistent because

A) of the lag times associated with the implementation of financial policy and also its impact on the economy. B) policymakers space tempted to seek discretionary policy that is much more contractionary in the short run. C) policymakers space tempted to go after discretionary plan that is an ext expansionary in the short run. D) that the lag times connected with the recognition of a potential financial problem and also the implementation of monetary policy.

The time-inconsistency problem with monetary policy tells united state that, if policymakers use discretionary policy, over there is a higher probability the the ________ will be higher, compared to policy makers adhering to a behavior rule.

A) inflation rate B) unemployment rate C) interest price D) foreign exchange price

The theory that financial policy conducted on a discretionary, day-by-day basis leader to negative long-run outcomes is referred to as the

A) adverse selection problem. B) ethical hazard problem. C) time-inconsistency problem. D) nominal-anchor problem.

The ________ difficulty of discretionary policy arises because economic behavior is affected by what firms and also people expect the financial authorities to do in the future.

A) ethical hazard B) time-inconsistency C) nominal-anchor D) rational-expectation

If the central bank pursues a financial policy the is more expansionary than what firms and also people expect, then the main bank have to be trying to

A) an increase output in the brief run. B) constrain output in the quick run. C) constrain prices. D) boost prices in the brief run.

The time-inconsistency problem in monetary policy can happen when the central bank conducts policy

A) using a in the name of anchor. B) utilizing a strict and inflexible rule. C) ~ above a discretionary, day-by-day basis. D) utilizing a flexible, discretionary rule.

Explain the time-inconsistency problem. What is the most likely outcome that discretionary policy? What are the services to the time-inconsistency problem?

Answer: With plan discretion, policymakers have actually an motivation to attempt to increase output by follow expansionary policies as soon as expectations are set. The trouble is that this policy results no in higher output, yet in higher actual and expected inflation. The solution is to adopt a dominion to constrain discretion. In the name of anchors can provide the crucial constraint top top discretionary behavior.

Even if the Fed could fully control the money supply, monetary policy would certainly have doubters because

A) the Fed is asked to attain many goals, some of which room incompatible v others. B) the Fed"s purposes do not encompass high employment, making job unions a doubter of the Fed. C) the Fed"s primary goal is exchange rate stability, leading to it to ignore residential economic conditions. D) the is forced to save Treasury defense prices high.

High joblessness is undesirable because it

A) results in a ns of output. B) constantly increases inflation. C) constantly increases interest rates. D) reduce idle resources.

When employees voluntarily leave occupational while they look for better jobs, the resulting joblessness is called

A) structure unemployment. B) friction unemployment. C) cyclical unemployment. D) underemployment.

Unemployment result from a mismatch of workers" an abilities and job requirements is called

A) friction unemployment. B) structure unemployment. C) seasonal unemployment. D) cyclical unemployment.

The goal for high employment need to be a level of unemployment at i m sorry the need for labor amounts to the supply of labor. Economists contact this level of unemployment the

A) frictional level of unemployment. B) structural level the unemployment. C) herbal rate level the unemployment. D) Keynesian rate level of unemployment.

Supply-side financial policies seek to

A) progressive interest prices through contractionary monetary policy. B) boost federal federal government expenditures. C) increase consumption expenditures by increasing taxes. D) boost saving and also investment using taxation incentives.

The federal Reserve device was produced to

A) do it simpler to finance spending plan deficits. B) encourage financial market stability. C) reduced the joblessness rate. D) encourage rapid economic growth.

Having interest rate stability

A) enables for less uncertainty around future planning. B) leads to demands to curtail the Fed"s power. C) guarantees full employment. D) leads to troubles in financial markets.

Foreign exchange rate stability is important since a decline in the worth of the domestic currency will ________ the inflation rate, and an increase in the worth of the domestic money makes domestic industries ________ compete with completing foreign industries.

A) increase; an ext B) increase; less C) decrease; more D) decrease; less

Which collection of purposes can, in ~ times, dispute in the quick run?

A) high employment and also economic growth B) interest rate stability and also financial sector stability C) high employment and also price level stability D) exchange rate stability and also financial industry stability

The main goal that the European main Bank is

A) price stability. B) exchange price stability. C) interest price stability. D) high employment.

The mandate because that the financial policy purposes that has actually been offered to the European central Bank is an instance of a ________ mandate.

A) primary B) twin C) second D) ordered

The mandate for the financial policy objectives that has actually been provided to the federal Reserve mechanism is an instance of a ________ mandate.

A) major B) double C) an additional D) ordered

Either a dual or hierarchial mandate is acceptable as long as ________ is the main goal in the ________.

A) price stability; short run B) price stability; lengthy run C) to reduce business-cycle fluctuations; brief run D) to reduce business-cycle fluctuations; lengthy run

The kind of monetary policy the is supplied in Canada, new Zealand, and also the uk is

A) monetary targeting. B) inflation targeting. C) targeting v an latent nominal anchor. D) interest-rate targeting.

Which that the complying with is no an facet of inflation targeting?

A) a public notice of medium-term number targets because that inflation B) one institutional commitment come price stability as the main long-run score C) an information-inclusive strategy in i m sorry only monetary aggregates are used in making decisions around monetary policy D) raised accountability that the central bank for attaining the inflation objectives

The first country to embrace inflation targeting was

A) the united Kingdom. B) Canada. C) new Zealand. D) Australia.

In both new Zealand and also Canada, what has happened come the unemployment rate because the countries embraced inflation targeting?

A) The unemployment rate increased sharply. B) The unemployment rate remained constant. C) The unemployment rate has declined substantially after a spicy increase. D) The joblessness rate declined sharply automatically after the inflation targets to be adopted.

Which of the adhering to is no an benefit of inflation targeting?

A) reduction of the time-inconsistency problem B) enhanced monetary policy transparency C) there is an prompt signal ~ above the accomplishment of the target. D) consistency with autonomous principles

Which of the adhering to is no a disadvantage come inflation targeting?

A) there is a delayed signal about achievement of the target. B) Inflation targets might impose a rigid dominion on policymakers. C) over there is potential for larger output fluctuations. D) there is a absence of transparency.

The decision by inflation targeters to select inflation targets ________ zero mirrors the worry of financial policymakers that particularly ________ inflation deserve to have substantial an adverse effects ~ above real economic activity.

A) below; high B) below; short C) above; high D) above; low

Inflation targets have the right to increase the central bank"s adaptability in responding to decreases in aggregate spending. Declines in accumulation ________ that reason the inflation price to fall below the floor that the target variety will automatically stimulate the central bank to ________ monetary policy without fearing that this activity will create a increase in inflation expectations.

A) demand: tighten B) demand; loosen C) supply; tighten D) supply; loosen

Explain what inflation targeting is. What are the advantages and disadvantages of this kind of monetary policy strategy?

Answer: there are five main aspects to inflation targeting: 1. A public notice of a medium-term target because that the inflation rate; 2. A commitment come price security as the primary long-term score of policy; 3. Many variables are provided in make decisions about policy moves; 4. Boosted transparency about policy strategy through the public; 5. The main bank has increased accountability because that attaining policy goals.

The advantages of inflation targeting include: 1. The simplicity and clarity that a numerical target because that the inflation rate; 2. There is enhanced accountability the the main bank; 3. Reduce the effects of inflationary shocks.

The disadvantages of inflation targeting include: 1. Over there is a delay signal about the achievement of the target; 2. It could lead to a rigid dominance where the only emphasis is the inflation rate (has not taken place in practice); 3. If sole focus is the inflation rate, larger output fluctuations can happen (has not happened in practice).

The form of monetary policy program that the commonwealth Reserve has complied with From the 1980s increase until the moment Ben Bernanke became chair of the federal Reserve in 2006 can ideal be explained as

A) monetary targeting. B) inflation targeting. C) plan with an implicitly nominal anchor. D) exchange-rate targeting.

Estimates from big macroeconometric models of the U.S. Economy says that it takes over ________ for monetary policy to affect output and over ________ for monetary policy to impact the inflation rate.

A) 1 year; 2 years B) 2 years; 1 year C) 1 year; 6 months D) 6 months; 1 year

Which the the adhering to is not a disadvantage of of the Fed"s "just perform it" method to monetary policy?

A) there is short transparency the policy. B) there is low accountability for central bankers. C) This form of policy make the Fed more susceptible to the time-inconsistency problem. D) It relies on a steady money-inflation relationship.

Suppose that takes approximately two years for financial policy to have actually a far-ranging impact top top inflation. If inflation is at this time low however policymakers think inflation will increase over the following two years through an unmodified stance of financial policy, when should they tighten monetary policy to avoid the inflationary surge?

A) now B) wait until overt signs of inflation show up C) following year D) two years later on

Under Alan Greenspan and Ben Bernanke, the federal Reserve did well in

pursuing a ________ policy.

A) preemptive B) inflation targeting C) exchange price targeting D) monetary targeting

After Ben Bernanke ended up being chair the the Fed in 2006, he

A) raised Fed transparency. B) exit inflation targeting. C) provided "just execute it" policy. D) increased the opacity that the policymaking.

The FOMC ultimately moved to ________ ~ above January 25, 2012, as soon as it authorize its "Statement ~ above Long-Run

Goals and also Monetary plan Strategy."

A) inflation targeting B) zero inflation plan C) "just perform it" policy D) monetary targeting

In the FOMC"s "Statement on Long-Run Goals and Monetary plan Strategy,"the FOMC agreed come a single numerical worth of the inflation objective, 2% top top the ________.

A) injected deflator B) GDP deflator C) CPI D) PPI

The FOMC "Statement on Long-Run Goals and also Monetary plan Strategy"made the clear that the federal Reserve would be follow ________, regular with its double mandate.

A) a flexible type of inflation targeting B) a strict type of inflation targeting C) a zero inflation targeting D) an latent inflation targeting

Lessons the economists and policy makers have actually learned native the recent an international financial situation include

A) developments in the gaue won sector have a much greater affect on economic task than was earlier realized. B) The zero lower bound on interest rates have the right to be a serious problem. C) The price of clean up after a financial situation is very high. D) Price and output stability perform not certain financial stability. E) every one of the above.

The troubles of increasing the level that the inflation target include

A) if the zero-lower-bound problem is rare, then the services of a greater inflation target space not really large. B) the prices of greater inflation in regards to the distortions the produces in the economic situation are high. C) that is more daunting to stabilize the inflation rate at a greater targeting level. D) all of the above.

The "Greenspan doctrine"—central banks should not shot to prick bubbles—was based on which the the following arguments?

A) Asset-price bubbles are practically impossible come identify. B) monetary actions would certainly be most likely to influence asset prices in general, fairly than the certain assets that space experiencing a bubble. C) increasing interest prices has often been uncovered to reason a balloon to burst much more severely. D) financial policy actions come prick bubbles deserve to have harmful impacts on the accumulation economy. E) every one of the above.

When asset prices increase above their fundamental values it is dubbed an

A) asset-price bubble. B) irrational bubble. C) asset-price spike. D) irrational spike.

Suppose interest prices are kept really low for a lengthy time such the there is a spike in the lot of lending. Every little thing else organized constant, this could reason ________ bubble.

A) one irrational exuberance B) a credit-driven C) a share D) a debt-driven

A credit-driven bubble arises when ________ in lending causes ________ in asset prices which can reason ________ in lending.

A) a decrease; a decrease; boost B) a decrease; one increase; an increase C) an increase; an increase; a additional increase D) a decrease; a decrease; a further decrease

________ balloon is driven totally by unrealistic optimistic expectations.

A) one irrational exuberance B) A credit-driven C) A share D) A debt-driven

Everything else held constant, a credit-drive balloon is generally taken into consideration to have actually the potential to cause ________ damage to one economy compared to an irrational exuberance bubble.

A) less B) around the same amount the C) more D) one of two people more, less, or the exact same amount that

A main bank has ________ possibility to determine a credit-driven bubble compared to one irrational exuberance bubble.

A) a higher B) much less of a C) about the very same level of a D) a greater, less or about the exact same level that a

Which of the adhering to is no an argument versus using monetary policy come prick asset-price bubbles?

A) The result of boosting interest prices on asset price is uncertain. B) A bubble might only exist in part asset-prices and also monetary plan will affect all legacy prices. C) Using financial policy to prick one asset-price balloon may have actually adverse result on the accumulation economy. D) even though credit-drive balloon are easier to identify, they are still fairly hard to identify.

Which that the adhering to is not an operation instrument?

A) nonborrowed reserves B) financial base C) federal funds interest price D) discount price

Which that the following is a potential operation instrument for the main bank?

A) the financial base B) the M1 money supply C) in the name of GDP D) the discount rate

Due come the lack of fashionable data for the price level and also economic growth, the Fed"s strategy

A) targets the exchange rate, because the Fed can manage this variable. B) targets the price the gold, since it is closely related to economic activity. C) offers an intermediate target, such as an attention rate. D) stabilizes the customer price index, because the Fed can control the CPI.

If the central bank targets a monetary aggregate, it is likely to lose regulate over the interest rate because

A) that fluctuations in the need for reserves. B) of fluctuations in the consumption function. C) bond values will often tend to remain stable. D) that fluctuations in the business cycle.

If the Fed pursues a strategy the targeting an interest rate when fluctuations in money need are prevalent

A) fluctuations the nonborrowed reserves will be small. B) fluctuations that nonborrowed reserves will certainly be large. C) the Fed will certainly probably conveniently abandon this policy, as it did in the 1960s. D) the Fed will certainly probably quickly abandon this policy, as it did in the 1950s.

Fluctuations in the need for reserves reason the Fed to lose regulate over a monetary aggregate if the Fed targets

A) a monetary aggregate. B) the monetary base. C) an interest rate. D) in the name of GDP.

Real interest prices are challenging to measure up because

A) data on them room not available in a fashionable manner. B) real interest rates depend top top the hard-to-determine expected inflation rate. C) they fluctuate too frequently to be accurate. D) they can not be controlled by the Fed.

Which the the following criteria require NOT it is in satisfied for picking a plan instrument?

A) The variable should be measurable. B) The variable need to be controllable. C) The variable must be predictable. D) The variable must be transportable.

Which that the following is no a need in selecting a plan instrument?

A) measurability B) controllability C) versatility D) predictability

When it come to choosing an plan instrument, both the ________ rate and ________ aggregates space measured accurately and also are obtainable daily with virtually no delay.

A) three-month T-bill; monetary B) three-month T-bill; reserve C) commonwealth funds; financial D) federal funds; make reservation

Explain and also demonstrate graphically just how targeting nonborrowed to make reservation can an outcome in commonwealth funds price instability.

Answer: See figure - thing 16 Number 66

When nonborrowed make reservation are held constant, boosts in the demand for reserves result in the federal funds rate increasing and decreases in the need for nonborrowed reserves result in the federal funds price declining. Due to the fact that fluctuations in demand do not reason monetary policy actions, the an outcome is the federal funds rate will fluctuate (assuming the equilibrium federal funds price is below the discount rate).


Explain and demonstrate graphically how targeting the commonwealth funds price can result in fluctuations in nonborrowed reserves.

Answer: See number - thing 16 Number 67

With a federal funds rate target, fluctuations in need for reserves require similar changes in the nonborrowed to make reservation to save the federal funds price constant.

According come the Taylor rule, the Fed need to raise the commonwealth funds interest rate as soon as inflation ________ the Fed"s inflation target or as soon as real GDP ________ the Fed"s output target.

A) rises above; drops listed below B) autumn below; drops below C) rises above; rises over D) drops below; rises over

Using Taylor"s rule, as soon as the equilibrium actual federal funds rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and also the really inflation price is 2 percent, the nominal federal funds rate target should be

A) 5 percent. B) 5.5 percent. C) 6 percent. D) 6.5 percent.

Using Taylor"s rule, when the equilibrium actual federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and also the target inflation price is 2 percent, the nominal commonwealth funds rate should be

A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent.

According come the Taylor Principle, when the inflation price rises, the nominal attention rate need to be ________ by ________ 보다 the inflation rate increase.

A) increased; much more B) increased; less C) decreased; much more D) decreased; much less

If the Taylor principle is not followed and nominal interest rates are raised by much less than the boost in the inflation rate, then real interest rates will ________ and monetary plan will be also ________.

A) rise; tight B) rise; loosened C) fall; tight D) fall; loose

The rate of inflation has tendency to remain constant when

A) the unemployment price is over the NAIRU. B) the unemployment rate amounts to the NAIRU. C) the unemployment rate is below the NAIRU. D) the unemployment rate increases faster than the NAIRU increases.

The rate of inflation boosts when

A) the unemployment rate equals the NAIRU. B) the unemployment rate exceeds the NAIRU. C) the unemployment rate is much less than the NAIRU. D) the unemployment price increases faster than the NAIRU increases.

Explain the Taylor rule, including the formula for setting the commonwealth funds price target, and the components of the formula. If the Fed to be to usage this rule, how numerous goals would it use to collection monetary policy?

Answer: The Taylor dominion specifies the the target federal money rates need to be set to same the equilibrium genuine federal accumulation rate, to add the price of inflation (for the Fisher effect), add to one-half times the output gap, add to one-half times the inflation gap. The formula is

Federal funds rate target = equilibrium genuine federal funds rate + inflation rate + (output gap) + (inflation gap)

The output gap is the percent deviation of actual GDP from potential full-employment actual GDP. The inflation gap is the difference in between actual inflation and the main bank"s target rate of inflation. The equilibrium genuine federal funds rate is the real rate continual with full employment in the lengthy run. The inflation rate is the actual price of inflation. The Taylor dominance sets the commonwealth funds price recognizing the purposes of short inflation and full employed (or equilibrium long-run financial growth).

In pursuing a strategy of financial targeting, the main bank announces that it will achieve a details value (the target) of the yearly growth rate of a ________.

A) a monetary accumulation B) a reserve accumulation C) the monetary base D) GDP

During the years 1979 to 1982, the federal Reserve"s announced policy was monetary targeting. During this time period the federal Reserve

A) hit all of their financial targets. B) did not hit any type of of their monetary targets since it is thought that regulating the money supply was no the intent of the federal Reserve. C) did not hit any kind of of their monetary targets due to the fact that they were unrealistic. D) struggle about fifty percent of their monetary targets.

Compared to the united States, Japan"s experience with financial targeting during the 1978––1987 duration performed

A) better with regard come the inflation rate and output fluctuations. B) worse v regard to the inflation rate and also output fluctuations. C) far better with regard come the inflation rate, however worse through regard to calculation fluctuations. D) worse through regard come the inflation rate, but better with regard to calculation fluctuations.

One the the factors that added to the success German policymakers had using a monetary targeting form policy beginning in the mid-1970s and continuing through the next two years was that

A) they used a rigid target for the money growth rate. B) they implemented policy so your inflation price goal to be met in the brief run. C) the money target was flexible to permit the Bundesbank to concentration on other goals as needed. D) lock rarely interacted the intentions of policy to the public in bespeak to save the public from panicking.

The European main Bank (ECB) pursues a hybrid financial policy strategy that has aspects in usual with the -targeting strategy previously used by the Bundesbank but additionally includes some facets of targeting.

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A) monetary; inflation B) inflation; financial C) monetary; exchange price D) monetary; nominal GDP

Which that the complying with is an advantage to money targeting?

A) over there is an immediate signal ~ above the accomplishment of the target. B) that does not count on a secure money-inflation relationship. C) that implies lack of transparency. D) It indicates smaller output fluctuations.

Which that the adhering to is a disadvantage to financial targeting?

A) It relies on a stable money-inflation relationship. B) over there is a delayed signal around the accomplishment of a target. C) that implies bigger output fluctuations. D) It indicates a lack of transparency.

If the relationship between the monetary accumulation and the score variable is weak, then

A) monetary aggregate targeting is remarkable to exchange-rate targeting. B) monetary accumulation targeting is superior to inflation targeting. C) inflation targeting is premium to exchange-rate targeting. D) monetary aggregate targeting will not work.

The financial policy strategy that counts on a steady money-income partnership is

A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor.

In its earliest years, the federal Reserve"s guiding principle for the conduct of financial policy was known as the

A) actual bills doctrine. B) liberal liquidity doctrine. C) complimentary reserves doctrine. D) quantity theory of money.

The guiding principle because that the conduct of financial policy that hosted that as lengthy as loans were being created "productive" purposes, then offering reserves to the banking device to make these loans would not be inflationary ended up being known as the

A) free reserves doctrine. B) Benjamin solid doctrine. C) effective liquidity doctrine. D) genuine bills doctrine.

The real bills doctrine to be the guiding principle for the command of monetary policy during the

A) 1910s. B) 1940s. C) 1950s. D) 1960s.

The Fed accidentally uncovered open market operations in the early

A) 1920s. B) 1910s. C) 1900s. D) 1890s.

The Fed accidentally uncovered open sector operations when

A) it pertained to the rescue of failing banks in the beforehand 1930s, and also found that its purchase of bank loans injected reserves into the bank system. B) that purchased securities for income following the 1920-1921 recession. C) the attempted to slow-moving inflation in 1919 by offering securities and found the its sales drained reserves from the bank system. D) that reinterpreted a an essential provision the the federal Reserve Act.

The Fed"s failure of the at an early stage 1930s were compounded by its decision to

A) progressive reserve demands in 1936-1937. B) lower reserve requirements in 1936-1937. C) advanced the financial base in 1936-1937. D) reduced the monetary base in 1936-1937.

During world War II, anytime interest prices would ________ and the price of binding would start to ________, the Fed would certainly make open industry purchases.

A) rise; increase B) rise; autumn C) fall; climb D) fall; autumn

During world War II, whenever interest rates would rise and the price of bond would start to fall, the Fed would

A) lower reserve requirements. B) raise reserve requirements. C) do open sector purchases of federal government securities. D) make open sector sales of government securities.

During people War II, the Fed in impact relinquished its regulate of financial policy with its plan of

A) continuous lowering reserve requirements. B) continually raising reserve requirements. C) pegging attention rates. D) targeting complimentary reserves.

The Fed to be committed to keeping interest rates low to help Treasury gaue won of spending plan deficits

A) just during civilization War I. B) throughout the an excellent Depression. C) during people War I and also World battle II. D) transparent the whole existence of the Fed.

The Fed-Treasury Accord of march 1951 detailed the Fed greater liberty to

A) let interest prices increase. B) let unemployment increase. C) allow inflation accelerate. D) allow exchange prices increase.