Economics of Money, Banking, and Financial Markets, 11e (Mishkin)
Chapter 16 The Conduct of Monetary Policy: Strategy and Tactics
16.1 The Price Stability Goal and The Nominal Anchor
1) The most common definition that monetary policymakers use for price stability is
A) low and stable deflation.
B) an inflation rate of zero percent.
C) high and stable inflation.
D) low and stable inflation.
2) Inflation results in
A) ease of planning for the future.
B) ease of comparing prices over time.
C) lower nominal interest rates.
D) difficulty interpreting relative price movements.
3) Economists believe that countries recently suffering hyperinflation have experienced
A) reduced growth.
B) increased growth.
C) reduced prices.
D) lower interest rates.
4) A nominal variable, such as the inflation rate or the money supply, which ties down the price
level to achieve price stability is called ________ anchor.
A) a nominal
B) a real
C) an operating
D) an intermediate
5) A central feature of monetary policy strategies in all countries is the use of a nominal variable
that monetary policymakers use as an intermediate target to achieve an ultimate goal such as
price stability. Such a variable is called a nominal
A) anchor.
B) benchmark.
C) tether.
D) guideline.
6) A nominal anchor promotes price stability by
A) outlawing inflation.
B) stabilizing interest rates.
C) keeping inflation expectations low.
D) keeping economic growth low.
7) Monetary policy is considered time-inconsistent because
A) of the lag times associated with the implementation of monetary policy and its effect on the
economy.
B) policymakers are tempted to pursue discretionary policy that is more contractionary in the
short run.
C) policymakers are tempted to pursue discretionary policy that is more expansionary in the
short run.
D) of the lag times associated with the recognition of a potential economic problem and the
implementation of monetary policy.
8) The time-inconsistency problem with monetary policy tells us that, if policymakers use
discretionary policy, there is a higher probability that the ________ will be higher, compared to
policy makers following a behavior rule.
A) inflation rate
B) unemployment rate
C) interest rate
D) foreign exchange rate
9) The theory that monetary policy conducted on a discretionary, day-by-day basis leads to poor
long-run outcomes is referred to as the
A) adverse selection problem.
B) moral hazard problem.
C) time-inconsistency problem.
D) nominal-anchor problem.
10) The ________ problem of discretionary policy arises because economic behavior is
influenced by what firms and people expect the monetary authorities to do in the future.
A) moral hazard
B) time-inconsistency
C) nominal-anchor
D) rational-expectation
11) If the central bank pursues a monetary policy that is more expansionary than what firms and
people expect, then the central bank must be trying to
A) boost output in the short run.
B) constrain output in the short run.
C) constrain prices.
D) boost prices in the short run.
12) The time-inconsistency problem in monetary policy can occur when the central bank
conducts policy
A) using a nominal anchor.
B) using a strict and inflexible rule.
C) on a discretionary, day-by-day basis.
D) using a flexible, discretionary rule.
13) Explain the time-inconsistency problem. What is the likely outcome of discretionary policy?
What are the solutions to the time-inconsistency problem?
16.2 Other Goals of Monetary Policy
1) Even if the Fed could completely control the money supply, monetary policy would have
critics because
A) the Fed is asked to achieve many goals, some of which are incompatible with others.
B) the Fed’s goals do not include high employment, making labor unions a critic of the Fed.
C) the Fed’s primary goal is exchange rate stability, causing it to ignore domestic economic
conditions.
D) it is required to keep Treasury security prices high.
2) High unemployment is undesirable because it
A) results in a loss of output.
B) always increases inflation.
C) always increases interest rates.
D) reduces idle resources.
3) When workers voluntarily leave work while they look for better jobs, the resulting
unemployment is called
A) structural unemployment.
B) frictional unemployment.
C) cyclical unemployment.
D) underemployment.
4) Unemployment resulting from a mismatch of workers’ skills and job requirements is called
A) frictional unemployment.
B) structural unemployment.
C) seasonal unemployment.
D) cyclical unemployment.
5) The goal for high employment should be a level of unemployment at which the demand for
labor equals the supply of labor. Economists call this level of unemployment the
A) frictional level of unemployment.
B) structural level of unemployment.
C) natural rate level of unemployment.
D) Keynesian rate level of unemployment.
6) Supply-side economic policies seek to
A) raise interest rates through contractionary monetary policy.
B) increase federal government expenditures.
C) increase consumption expenditures by increasing taxes.
D) increase saving and investment using tax incentives.
7) The Federal Reserve System was created to
A) make it easier to finance budget deficits.
B) promote financial market stability.
C) lower the unemployment rate.
D) promote rapid economic growth.
8) Having interest rate stability
A) allows for less uncertainty about future planning.
B) leads to demands to curtail the Fed’s power.
C) guarantees full employment.
D) leads to problems in financial markets.
9) Foreign exchange rate stability is important because a decline in the value of the domestic
currency will ________ the inflation rate, and an increase in the value of the domestic currency
makes domestic industries ________ competitive with competing foreign industries.
A) increase; more
B) increase; less
C) decrease; more
D) decrease; less
16.3 Should Price Stability be the Primary Goal of Monetary Policy?
1) Which set of goals can, at times, conflict in the short run?
A) high employment and economic growth
B) interest rate stability and financial market stability
C) high employment and price level stability
D) exchange rate stability and financial market stability
2) The primary goal of the European Central Bank is
A) price stability.
B) exchange rate stability.
C) interest rate stability.
D) high employment.
3) The mandate for the monetary policy goals that has been given to the European Central Bank
is an example of a ________ mandate.
A) primary
B) dual
C) secondary
D) hierarchical
4) The mandate for the monetary policy goals that has been given to the Federal Reserve System
is an example of a ________ mandate.
A) primary
B) dual
C) secondary
D) hierarchical
5) Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in
the ________.
A) price stability; short run
B) price stability; long run
C) reducing business-cycle fluctuations; short run
D) reducing business-cycle fluctuations; long run
16.4 Inflation Targeting
1) The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is
A) monetary targeting.
B) inflation targeting.
C) targeting with an implicit nominal anchor.
D) interest-rate targeting.
2) Which of the following is NOT an element of inflation targeting?
A) a public announcement of medium-term numerical targets for inflation
B) an institutional commitment to price stability as the primary long-run goal
C) an information-inclusive approach in which only monetary aggregates are used in making
decisions about monetary policy
D) increased accountability of the central bank for attaining its inflation objectives
3) The first country to adopt inflation targeting was
A) the United Kingdom.
B) Canada.
C) New Zealand.
D) Australia.
4) In both New Zealand and Canada, what has happened to the unemployment rate since the
countries adopted inflation targeting?
A) The unemployment rate increased sharply.
B) The unemployment rate remained constant.
C) The unemployment rate has declined substantially after a sharp increase.
D) The unemployment rate declined sharply immediately after the inflation targets were adopted.
5) Which of the following is NOT an advantage of inflation targeting?
A) reduction of the time-inconsistency problem
B) increased monetary policy transparency
C) There is an immediate signal on the achievement of the target.
D) consistency with democratic principles
6) Which of the following is NOT a disadvantage to inflation targeting?
A) There is a delayed signal about achievement of the target.
B) Inflation targets could impose a rigid rule on policymakers.
C) There is potential for larger output fluctuations.
D) There is a lack of transparency.
7) The decision by inflation targeters to choose inflation targets ________ zero reflects the
concern of monetary policymakers that particularly ________ inflation can have substantial
negative effects on real economic activity.
A) below; high
B) below; low
C) above; high
D) above; low
8) Inflation targets can increase the central bank’s flexibility in responding to declines in
aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall below
the floor of the target range will automatically stimulate the central bank to ________ monetary
policy without fearing that this action will trigger a rise in inflation expectations.
A) demand: tighten
B) demand; loosen
C) supply; tighten
D) supply; loosen
9) Explain what inflation targeting is. What are the advantages and disadvantages of this type of
monetary policy strategy?
16.5 The Evolution of the Federal Reserve’s Monetary Policy Strategy
1) The type of monetary policy regime that the Federal Reserve has followed From the 1980s up
until the time Ben Bernanke became chair of the Federal Reserve in 2006 can best be described
as
A) monetary targeting.
B) inflation targeting.
C) policy with an implicit nominal anchor.
D) exchange-rate targeting.
2) Estimates from large macroeconometric models of the U.S. economy suggests that it takes
over ________ for monetary policy to affect output and over ________ for monetary policy to
affect the inflation rate.
A) 1 year; 2 years
B) 2 years; 1 year
C) 1 year; 6 months
D) 6 months; 1 year
3) Which of the following is NOT a disadvantage of of the Fed’s “just do it” approach to
monetary policy?
A) There is low transparency of policy.
B) There is low accountability for central bankers.
C) This type of policy make the Fed more susceptible to the time-inconsistency problem.
D) It relies on a stable money-inflation relationship.
4) Suppose it takes roughly two years for monetary policy to have a significant impact on
inflation. If inflation is currently low but policymakers believe inflation will rise over the next
two years with an unchanged stance of monetary policy, when should they tighten monetary
policy to prevent the inflationary surge?
A) now
B) wait until overt signs of inflation appear
C) next year
D) two years later
5) Under Alan Greenspan and Ben Bernanke, the Federal Reserve was successful in
pursuing a ________ policy.
A) preemptive
B) inflation targeting
C) exchange rate targeting
D) monetary targeting
6) After Ben Bernanke became chair of the Fed in 2006, he
A) increased Fed transparency.
B) abandoned inflation targeting.
C) used “just do it” policy.
D) increased the opacity of the policymaking.
7) The FOMC finally moved to ________ on January 25, 2012, when it issued its “Statement on
Long-Run
Goals and Monetary Policy Strategy.”
A) inflation targeting
B) zero inflation policy
C) “just do it” policy
D) monetary targeting
8) In the FOMC’s “Statement on Long-Run Goals and Monetary Policy Strategy,”the FOMC
agreed to a single numerical value of the inflation objective, 2% on the ________.
A) PCE deflator
B) GDP deflator
C) CPI
D) PPI
9) The FOMC “Statement on Long-Run Goals and Monetary Policy Strategy”made it clear that
the Federal Reserve would be pursuing ________, consistent with its dual mandate.
A) a flexible form of inflation targeting
B) a strict form of inflation targeting
C) a zero inflation targeting
D) an implicit inflation targeting
16.6 Lessons for Monetary Policy Strategy from the Global Financial Crisis
1) Lessons that economists and policy makers have learned from the recent global financial crisis
include
A) Developments in the financial sector have a far greater impact on economic activity than was
earlier realized.
B) The zero lower bound on interest rates can be a serious problem.
C) The cost of cleaning up after a financial crisis is very high.
D) Price and output stability do not ensure financial stability.
E) All of the above.
2) The problems of raising the level of the inflation target include
A) if the zero-lower-bound problem is rare, then the benefits of a higher inflation target are not
very large.
B) the costs of higher inflation in terms of the distortions it produces in the economy are high.
C) it is more difficult to stabilize the inflation rate at a higher targeting level.
D) all of the above.
16.7 Should Central Banks Try to Stop Asset-Price Bubbles?
1) The “Greenspan doctrine”—central banks should not try to prick bubbles—was based on
which of the following arguments?
A) Asset-price bubbles are nearly impossible to identify.
B) Monetary actions would be likely to affect asset prices in general, rather than the specific
assets that are experiencing a bubble.
C) Raising interest rates has often been found to cause a bubble to burst more severely.
D) Monetary policy actions to prick bubbles can have harmful effects on the aggregate economy.
E) All of the above.
2) When asset prices increase above their fundamental values it is called an
A) asset-price bubble.
B) irrational bubble.
C) asset-price spike.
D) irrational spike.
3) Suppose interest rates are kept very low for a long time such that there is a spike in the amount
of lending. Everything else held constant, this could cause ________ bubble.
A) an irrational exuberance
B) a credit-driven
C) a stock
D) a debt-driven
4) A credit-driven bubble arises when ________ in lending causes ________ in asset prices
which can cause ________ in lending.
A) a decrease; a decrease; an increase
B) a decrease; an increase; an increase
C) an increase; an increase; a further increase
D) a decrease; a decrease; a further decrease
5) ________ bubble is driven entirely by unrealistic optimistic expectations.
A) An irrational exuberance
B) A credit-driven
C) A stock
D) A debt-driven
6) Everything else held constant, a credit-drive bubble is generally considered to have the
potential to cause ________ damage to an economy compared to an irrational exuberance
bubble.
A) less
B) about the same amount of
C) more
D) either more, less, or the same amount of
7) A central bank has ________ chance to identify a credit-driven bubble compared to an
irrational exuberance bubble.
A) a greater
B) less of a
C) about the same level of a
D) a greater, less or about the same level of a
8) Which of the following is NOT an argument against using monetary policy to prick asset-
price bubbles?
A) The effect of increasing interest rates on asset prices is uncertain.
B) A bubble may only exist in some asset-prices and monetary policy will affect all asset prices.
C) Using monetary policy to prick an asset-price bubble may have adverse effect on the
aggregate economy.
D) Even though credit-drive bubbles are easier to identify, they are still relatively hard to
identify.
16.8 Tactics: Choosing the Policy Instrument
1) Which of the following is NOT an operating instrument?
A) nonborrowed reserves
B) monetary base
C) federal funds interest rate
D) discount rate
2) Which of the following is a potential operating instrument for the central bank?
A) the monetary base
B) the M1 money supply
C) nominal GDP
D) the discount rate
3) Due to the lack of timely data for the price level and economic growth, the Fed’s strategy
A) targets the exchange rate, since the Fed can control this variable.
B) targets the price of gold, since it is closely related to economic activity.
C) uses an intermediate target, such as an interest rate.
D) stabilizes the consumer price index, since the Fed can control the CPI.
4) If the central bank targets a monetary aggregate, it is likely to lose control over the interest
rate because
A) of fluctuations in the demand for reserves.
B) of fluctuations in the consumption function.
C) bond values will tend to remain stable.
D) of fluctuations in the business cycle.
5) If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand
are prevalent
A) fluctuations of nonborrowed reserves will be small.
B) fluctuations of nonborrowed reserves will be large.
C) the Fed will probably quickly abandon this policy, as it did in the 1960s.
D) the Fed will probably quickly abandon this policy, as it did in the 1950s.
6) Fluctuations in the demand for reserves cause the Fed to lose control over a monetary
aggregate if the Fed targets
A) a monetary aggregate.
B) the monetary base.
C) an interest rate.
D) nominal GDP.
7) Real interest rates are difficult to measure because
A) data on them are not available in a timely manner.
B) real interest rates depend on the hard-to-determine expected inflation rate.
C) they fluctuate too often to be accurate.
D) they cannot be controlled by the Fed.