Economics of Money, Banking, and Financial Markets, 12e (Mishkin)
Chapter 23 Monetary Policy Theory
23.1 Response of Monetary Policy to Shocks
1) Policy makers cannot achieve both price stability and economic activity stability when facing
A) temporary supply shocks.
B) permanent supply shocks.
C) demand shocks.
D) all of the above.
2) The disruption to financial markets starting in August 2007 that caused both consumer and
business spending to fall
A) shifted the aggregate demand curve to the right.
B) shifted the aggregate demand curve to the left.
C) shifted the aggregate supply curve to the right.
D) shifted the aggregate supply curve to the left.
3) When the economy is hit by a negative demand shock and the central bank does not respond
by changing the autonomous component of monetary policy, then
A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will not change.
E) both A and B.
4) When the economy is hit by a negative demand shock and the central bank pursues policies to
increase aggregate demand to its initial level, then
A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will be unchanged.
E) both B and D.
5) If the economy suffers a permanent negative supply shock because there is an increase in
regulations that permanently reduce the level of potential output, then
A) potential output falls.
B) the long-run aggregate supply curve shifts leftward.
C) the short-run aggregate supply curve shifts upward.
D) all of the above.
6) When the economy suffers a permanent negative supply shock and the central bank does not
respond by changing the autonomous component of monetary policy, then
A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will not change.
E) both A and B.
7) When the economy suffers a permanent negative supply shock and the central bank does not
respond by changing the autonomous component of monetary policy, then
A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will not change.
E) both B and C.
8) When the economy suffers a permanent negative supply shock and the central bank does not
respond by changing the autonomous component of monetary policy, then
A) inflation will be lower.
B) output will be at its potential.
C) output will be unchanged.
D) inflation will be unchanged.
9) When the economy suffers a permanent negative supply shock and the central bank does not
respond by changing the autonomous component of monetary policy, then
A) inflation will be higher.
B) output will be at its potential.
C) output will be unchanged.
D) inflation will be unchanged.
E) both A and B.
10) When the economy suffers a permanent negative supply shock and the central bank responds
by changing the autonomous component of monetary policy to keep inflation at the target
inflation rate, then
A) aggregate demand curve shifts leftward.
B) aggregate demand curve shifts rightward.
C) output will be unchanged.
D) both A and C.
11) When the economy suffers a permanent negative supply shock and the central bank responds
by changing the autonomous component of monetary policy to keep inflation at the target
inflation rate, then
A) aggregate demand curve shifts leftward.
B) output will be unchanged.
C) output will be at its potential.
D) all of the above.
E) both A and C.
12) When the economy is hit by a temporary negative supply shock and the central bank does not
respond by changing the autonomous component of monetary policy, then in the long run
A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will be unchanged.
E) both B and D.
13) When the economy suffers a temporary negative supply shock and the central bank responds
by changing the autonomous component of monetary policy to keep inflation at the target
inflation rate, then
A) aggregate output drops in the short run.
B) output will return to potential output over time.
C) aggregate output is stabilized.
D) all of the above.
E) both A and B.
14) When the economy suffers a temporary negative supply shock, the central bank’s
autonomous monetary policy to keep inflation at the target inflation rate leads to
A) more stable economic activities.
B) a large deviation of output from its potential.
C) divine coincidence.
D) both B and C.
15) When the economy suffers a temporary negative supply shock and the monetary policy
makers try to stabilize economic activity in the short run, then
A) aggregate demand curve shifts rightward.
B) output will be at its potential.
C) inflation rate will be higher.
D) all of the above.
E) both A and B.
16) Which of the following statements is CORRECT?
A) If most shocks to the economy are aggregate demand shocks or permanent aggregate supply
shocks, then policy that stabilizes inflation will also stabilize economic activity, even in the short
run.
B) If temporary supply shocks are more common, then a central bank must choose between
stabilizing inflation and stabilizing output in the short run.
C) Stabilizing economic activity in response to a temporary supply shock results in a larger
deviation of inflation from the inflation target rather than a stabilization of inflation.
D) all of the above.
23.2 How Actively Should Policymakers Try to Stabilize Economic Activity?
1) Nonactivists of the policies believe that
A) wages and prices are very flexible.
B) the self-correcting mechanism is very rapid.
C) government action is unnecessary.
D) all of the above.
2) Activists of the policies believe that
A) the self-correcting mechanism through wage and price adjustment is very slow.
B) wages and prices are sticky.
C) the government needs to pursue active policy to eliminate high unemployment when it
develops.
D) all of the above.
3) If aggregate output is below the natural rate level, activists of policies would recommend that
the government
A) do nothing.
B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to
the right.
C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to
the right.
D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to
the left.
4) If aggregate output is below the natural rate level, nonactivists of policies would recommend
that the government
A) do nothing.
B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to
the right.
C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to
the right.
D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to
the left.
5) Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be
costly because it produces ________ volatility in both the price level and output.
A) supply; less
B) supply; more
C) demand; less
D) demand; more
6) The existence of lags prevents the instantaneous adjustment of the economy to policies
changing aggregate demand, thereby strengthening the case for
A) supply-side policy.
B) nonactivists.
C) activists.
D) demand-management policy.
7) The data lag is
A) the time it takes for policy makers to obtain data indicating what is happening in the
economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the future
course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have decided on
the new policy.
E) the time it takes for the policy actually to have an impact on the economy.
8) The recognition lag is
A) the time it takes for policy makers to obtain data indicating what is happening in the
economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the future
course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have decided on
the new policy.
E) the time it takes for the policy actually to have an impact on the economy.
9) The legislative lag represents
A) the time it takes for policy makers to obtain data indicating what is happening in the
economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the future
course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have decided on
the new policy.
E) the time it takes for the policy actually to have an impact on the economy.
10) The implementation lag is
A) the time it takes for policy makers to obtain data indicating what is happening in the
economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the future
course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have decided on
the new policy.
E) the time it takes for the policy actually to have an impact on the economy.
11) The effectiveness lag is
A) the time it takes for policy makers to obtain data indicating what is happening in the
economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the future
course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have decided on
the new policy.
E) the time it takes for the policy actually to have an impact on the economy.
12) The time it takes for policy makers to obtain data indicating what is happening in the
economy is called
A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.
13) The time it takes for policy makers to be sure of what the data are signaling about the future
course of the economy is called
A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.
14) The time it takes to pass legislation to implement a particular policy is called
A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.
15) The time it takes for policy makers to change policy instruments once they have decided on
the new policy is called
A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.
16) The time it takes for the policy actually to have an impact on the economy is called
A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.
17) The nonactivists who opposed the recent fiscal stimulus package argue that
A) fiscal stimulus would take too long to work because of long implementation lags.
B) fiscal stimulus might kick in after the economy had already recovered.
C) fiscal stimulus could lead to increased volatility in inflation and economic activity.
D) all of the above.
E) none of the above.
1) The economist who proposed that, “Inflation is always and everywhere a monetary
phenomenon” was
A) John Maynard Keynes.
B) John R. Hicks.
C) Milton Friedman.
D) Franco Modigliani.
2) Complete Milton Friedman’s famous proposition: “Inflation is always and everywhere a
________ phenomenon.”
A) monetary
B) political
C) policy
D) budgetary
23.4 Causes of Inflationary Monetary Policy
1) To say that inflation is a monetary phenomenon seems to beg the question
A) Why does inflationary monetary policy occur?
B) Why do politicians seek reelection?
C) Why is the Fed independent?
D) Why does the U.S. Treasury print so much money?
2) The combination of a successful wage push by workers and the government’s commitment to
high employment leads to
A) demand-pull inflation.
B) supply-side inflation.
C) supply-shock inflation.
D) cost-push inflation.
3) If workers do not believe that policymakers are serious about fighting inflation, they are most
likely to push for higher wages, which will ________ aggregate ________ and lead to
unemployment or inflation or both, everything else held constant.
A) decrease; demand
B) increase; demand
C) decrease; supply
D) increase; supply
4) If workers believe that government policymakers will increase aggregate demand to avoid a
politically unpopular increase in unemployment when workers demand higher wages, then
workers will not fear higher unemployment and their wage demands will result in
A) demand-pull inflation.
B) hyperinflation.
C) deflation.
D) cost-push inflation.
5) If policymakers set a target for unemployment that is too low because it is less than the natural
rate of unemployment, this can set the stage for a higher rate of money growth and
A) cost-push inflation.
B) demand-pull inflation.
C) cost-pull inflation.
D) demand-push inflation.
6) Theoretically, one can distinguish a demand-pull inflation from a cost-push inflation by
comparing
A) how fast prices rise relative to wages.
B) the unemployment rate with its natural rate level.
C) when prices rise relative to wages.
D) government debt to real GDP.
7) Demand-pull inflation can result when
A) policymakers set an unemployment target that is too high.
B) a persistent budget deficit is financed by selling bonds to the public.
C) a persistent budget deficit is financed by selling bonds to the central bank.
D) workers get numerous wage increases.
8) Which of the following is least likely to lead to inflationary monetary policy?
A) rising unemployment
B) expanding federal budget deficits
C) declining oil prices
D) conflict in the Middle East
9) Which of the following is most likely to lead to inflationary monetary policy?
A) declining oil prices
B) resolution of conflict in the Middle East
C) the enactment of a free-trade agreement with Mexico
D) rising unemployment
10) Which of the following is most likely to lead to inflationary monetary policy?
A) declining oil prices
B) resolution of conflict in the Middle East
C) the enactment of a free-trade agreement with Mexico
D) rising government budget deficits
11) Evidence from the time period 1960-1980 indicates that inflation in the United States
resulted from
A) an employment target that was set too high.
B) the government’s inability to sell bonds to the Fed.
C) an expansion in the money supply to finance federal government expenditures.
D) the excessive sale of government bonds to the public.
12) Because policies in the United States were too expansionary from 1965 through 1973, the
U.S. suffered
A) demand-pull inflation.
B) cost-push inflation, as workers sought higher wages in order to keep up with inflation.
C) both demand-pull and cost-push inflation.
D) neither demand-pull nor cost-push inflation.
13) In the period 1965 through the 1970s, policymakers pursued ________ policies in order to
achieve ________.
A) expansionary; high employment
B) expansionary; low inflation
C) contractionary; high employment
D) contractionary; low inflation
23.5 Monetary Policy at the Zero Lower Bound
1) When the policy rate hits its lower bound and inflation keeps falling, this portion of the
Monetary Policy curve is
A) downward sloping.
B) upward sloping.
C) flat.
D) undetermined.
2) When the policy rate hits its lower bound and inflation keeps falling, this portion of the
aggregate demand curve is
A) downward sloping.
B) upward sloping.
C) flat.
D) undetermined.
3) When output is below potential and the policy rate has hit the floor of zero, the resulting fall in
inflation leads to ________ real interest rates, which ________ output further, which causes
inflation to fall further.
A) lower; increase
B) higher; depress
C) higher; increase
D) lower; depress
4) When output is below potential and the policy rate has hit the floor of zero, if policymakers do
nothing, output will ________ and inflation will ________.
A) rise; fall
B) fall; fall
C) fall; rise
D) rise; rise
5) The real interest rate for investments reflects not only the short-term real interest rate set by
the central bank, but also the financial frictions. When the policy rate has hit the floor of zero, to
stimulate the economy at given inflation rates, policymakers can
A) lower the financial frictions.
B) lower the short-term real interest rate.
C) lower both the short-term real interest rate and the financial frictions.
D) lower the policy rate.
6) Liquidity provision and asset purchase may not be enough to stimulate the economy unless the
these policy actions are able to
A) lower the real interest rate for investments.
B) lower the short-term real interest rate.
C) raise the policy rate above zero.
D) lower the policy rate.
7) The Fed’s quantitative easing is to purchase ________ to affect credit spreads.
A) long-term securities
B) short-term securities
C) both long-term and short-term securities
D) private assets
8) With the policy rate set at zero, the rise in expected inflation will lead to a ________ in the
real interest
rate, which will cause investment spending and aggregate output to ________.
A) fall; rise
B) fall; fall
C) rise; rise
D) rise; fall
9) With the followings is NOT one of the reasons why quantitative easing in and of itself will not
necessarily be stimulative?
A) Most of the resulting increase in the monetary base just flows into holdings of excess
reserves.
B) Banks just add to their holdings of excess reserves instead of making loans.
C) The asset purchase program involves only the purchase of short-term government securities.
D) The asset purchase program involves only the purchase of long-term government securities.
10) To promote an economic expansion and an exit from the deflationary environment that the
Japanese had been experiencing for the past fifteen years, the “Abenomics” aims at
A) increasing inflation target.
B) increasing inflation expectations.
C) purchasing long-term bonds.
D) all of the above.
E) none of the above.