1. The systematic setting of policy according to a formula is known as
a. credibility.
b. an expectations trap.
c. discretionary policy.
d. a rule for monetary policy.
2. If monetary policy is not set by a rule, it is said to be set by
a. randomization.
b. discretion.
c. credibility.
d. destabilization.
3. When a central bank increases money growth, the bank is said to policy.
a. restrict
b. tighten
c. destabilize
d. ease
4. The Fed eases policy when it
a. decreases both the money growth and the federal funds rate.
b. decreases the money growth and increases the federal funds rate.
c. increases both the money growth and the federal funds rate.
d. increases the money growth and decreases the federal funds rate.
5. When a central bank decreases money growth, the bank is said to monetary policy.
a. tighten
b. loosen
c. destabilize
d. ease
6. The Fed is said to tighten policy when it
a. decreases both the money growth and the federal funds rate.
b. decreases the money growth and increases the federal funds rate.
c. increases both the money growth and the federal funds rate.
d. increases the money growth and decreases the federal funds rate.
7.
rate.
is said to occur when policymakers must increase inflation in response to an increase in the expected inflation
a. A liquidity trap
b. An expectations trap.
c. An adaptive expectations trap
d. An inflation trap
8. Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a
tight monetary policy?
a. The economy will enter into a recession.
b. The level of economic activity will increase.
c. The actual inflation rate will rise.
d. The federal funds rate will fall.
9. When the central bank chooses a policy at one date, which leads people to make decisions based on that policy,
which then causes the central bank to choose a different policy at a later date, then there is said to be
a. irrational expectations.
b. time inconsistency.
c. a liquidity trap.
d. an expectations trap.
10. People know that the Fed has the incentive to announce that the inflation rate will be 3 percent next year, so people
will build 3 percent inflation into their wage negotiations. But then the Fed has the incentive to increase inflation
above 3 percent to make the economy grow faster. This type of phenomenon is known as
a. inflation targeting.
b. time inconsistency.
c. McCallum’s rule.
d. an expectations trap.
11. Which of the following is an useful indicator of the stance of monetary policy?
a. The income tax rate
b. The federal funds rate
c. The exchange rate
d. The rate of unemployment
12. From 1991 to 2001, Argentina established commitment by
a. following the Taylor rule.
b. following a strict money growth rule.
c. establishing a currency board.
d. using a system of inflation targeting.
13. Monetarists think that
a. money growth is closely related to inflation in the long run.
b. money demand is unstable in the long run.
c. the central should focus on short run economic fluctuations.
d. the central bank should rely on discretionary policy making.
14. The average number of times a dollar of money is used for transactions over the course of a year is referred to as
the
a. money multiplier. b.
velocity of money. c.
money growth rate. d.
extent of exchange.
15. If a dollar of money is used 5 times in transactions in an economy over the course of a year and the supply of money
is $120 billion, what is the volume of total spending in the economy?
a. $5 billion
b. $600 billion
c. $240 billion
d. $20 billion
16. The equation that says money times velocity equals total spending is known as
a. the national income identity.
b. purchasing-power parity.
c. a covenant.
d. the equation of exchange.
17. Total spending divided by the money supply equals
a. the reserve requirement.
b. the transactions demand for money.
c. the money multiplier.
d. the velocity of money.
18. If the money supply is $300 billion, the price level is 1.3, and the real output is 1,300 billion, what is the velocity of
money?
a. 0.33
b. 3
c. 5.63
d. 300,000
19. If the velocity of money in an economy is 7.5, money supply is $350 billion, and the price level is 1.5, the real output
is worth
a. $1,750 billion
b. $1,200 billion
c. $2625 billion
d. $5250 billion
20. If the velocity of money is 8.2, the money supply is $223 billion, and real output is $958 billion, what is the price level?
a. 0.5
b. 0.8
c. 1.7
d. 1.9
21. If velocity of money is 6, the price level is 1.2, and real output is worth $1,100 billion, what is the money supply?
a. $65 billion
b. $153 billion
c. $220 billion
d. $5,500 billion
22. If the growth rate of velocity is –2 percent, the growth rate of money supply is 7 percent, and the inflation rate is 3
percent, what is the growth rate of real output?
a. 1 percent
b. 2 percent
c. 3 percent
d. 4 percent
23. If the growth rate of the money supply is 5 percent, the inflation rate is 2 percent, and real output growth is 2
percent, what is the growth rate of the velocity of money?
a. −5 percent
b. −1 percent
c. +1 percent
d. +5 percent
24. If the growth rate of the money supply is 4 percent, the growth rate of velocity of money is 1 percent, and real
output growth is 2 percent, what is the inflation rate?
a. −3 percent
b. −1 percent
c. +1 percent
d. +3 percent
25. A money-growth rule that does not respond to the state of the economy is a rule.
a. lagging
b. leading
c. nonactivist
d. activist
26. A money-growth rule that responds to the state of the economy is rule.
a. a lagging
b. a leading
c. a nonactivist
d. an activist
27. Under an activist rule,
a. the growth rate of money supply is greater than the inflation rate.
b. monetary policy is allowed to change over the course of the business cycle.
c. the growth rate of money supply is lower than the inflation rate.
d. monetary policy is not changed over the course of the business cycle.
28. Why have economists abandoned the use of money-growth rules in the United States?
a. Because the Fed can no longer control the money supply
b. Because the velocity growth rate has been too stable
c. Because of instability in money demand
d. Because money-growth rules are overly activist
29. The Taylor rule is
a. an activist rule.
b. a nonactivist rule.
c. used to set optimal tax rates.
d. used to set the amount of government spending.
30. The rule that is used to set a target for the federal funds rate in response to deviations of real output and inflation
from their targets is
a. the Taylor rule.
b. a nonactivist rule.
c. a money-growth rule.
d. Mc Cullum’s rule.
31. Taylor originally picked as the equilibrium real federal funds rate, which was equal to its historical average.
a. 1 percent
b. 2 percent
c. 3 percent
d. 4 percent
32. Taylor originally picked as the weight on the output gap and as the weight on the inflation gap in his rule.
a. 1; 1
b. 1; 1/2
c. 1/2; 1/2
d. 1/2; 1
33. Which terms in the equation for Taylor rule can be influenced by the government through monetary policy?
a. Inflation gap and interest-rate spread
b. Unemployment gap and interest-rate spread
c. Interest-rate spread and unemployment gap
d. Output gap and inflation gap
34. Which equation best represents the Taylor rule?
a. i = r* + πT + {w1 × [(Y − Y*)/Y*] × 100} + [w2 × (π − πT)]
b. i = r* + π + {w1 × [(Y − Y*)/Y*] × 100} + [w2 × (π − πT)]
c. i = r + πT + {w1 × [(Y − Y*)/Y*] × 100} + [w2 × (π − πT)]
d. i = r + π + {w1 × [(Y − Y*)/Y*] × 100} + (w2 × π)
35. If a country’s potential output is $100 billion and the output gap is 5%, the country’s actual output is
a. $500 billion.
b. $20 billion.
c. $95 billion.
d. $105 billion
36. If the potential output of an economy is worth $440 billion and the actual output during a particular year was $435
billion, the output gap is
a. -1.14 percent
b. 2.2 percent
c. -5 percent
d. 1.1 percent
37. Suppose the economy is thought to be 1 percent below potential (i.e., the output gap is −1 percent), when potential
output grows 4 percent per year. Suppose the Fed is following the Taylor rule, with an inflation rate of 4 percent
over the past year. The equilibrium real federal funds rate is 3 percent and the weights on the output gap and
inflation gap are 0.5 each. The inflation target is 1 percent. What should the federal funds rate be?
a. 4 percent
b. 6 percent
c. 8 percent
d. 12 percent
38. Suppose the Fed has set the federal funds rate at 4.5 percent using the Taylor rule. If the inflation rate increases by
1 percentage point and the weight on inflation gap is 0.5, all other variables remain unchanged, the federal funds rate
should
a. decrease to 3.5 percent.
b. decrease to 4 percent.
c. increase to 5.5 percent.
d. increase to 5 percent.