EC 303 - The Conduct of Monetary Policy: Strategy and Tactics Homework

EC 303 - JSU - The Conduct of Monetary Policy: Strategy and Tactics Homework

C. price stability

According to the​ text, the most important goal of

monetary policy

is thought to​ be:

Part 2

A.

eliminating deflation

B.

low interest rates

C.

price stability

D.

high economic growth rates

A. A parent says that he or she will punish a child whenever the child breaks a rule.​ Afterward, when the child​ misbehaves, the parent forgives the misbehavior because punishment is unpleasant for both the parent and child.

Which of the following best illustrates the

time-inconsistency problem

A.

A parent says that he or she will punish a child whenever the child breaks a rule.​ Afterward, when the child​ misbehaves, the parent forgives the misbehavior because punishment is unpleasant for both the parent and child.

B.

Your professor says that this course will end with a final exam. After you have studied and learned all the​ material, you are surprised to find the exam easier than you expected.

C.

A nation states that they will not negotiate over hostages. Once hostages are​ taken, policymakers do not make any concessions to obtain the​ hostages' release.

D.

Both A and B are correct.

E.

All of the above are correct.

B. False. There is no​ long-run trade-off between inflation and unemployment.

"A central bank with a dual mandate will achieve lower unemployment in the long run than a central bank with a hierarchical mandate in which price stability takes​ precedence." Is this statement true or​ false? Explain your answer.

A.

False. Inflation targeting still allows central banks to constantly adjust for unemployment concerns.

B.

False. There is no​ long-run trade-off between inflation and unemployment.

C.

True. Inflation targeting only allows a central bank to focus on inflation.

D.

True. The​ short-run Phillips curve shows an inverse relationship between inflation and unemployment.

C. policies that increase output and employment in the short run can create excessive inflation in the long run

The goals of a dual mandate can sometimes conflict​ because:

A.

it is difficult to achieve both​ long-run price stability and the natural rate of unemployment

B.

low and stable rates of inflation detract from economic growth

C.

policies that increase output and employment in the short run can create excessive inflation in the long run

A. It reduces uncertainty in inflation expectations of market participants.

Why is a public announcement of numerical inflation rate objectives important to the success of an​ inflation-targeting central​ bank?

A.

It reduces uncertainty in inflation expectations of market participants.

B.

It allows market participants to influence the inflation rate.

C.

It reduces the costs of high inflation to society.

D.

It imposes a rigid rule on monetary policymakers and thus limits any change in policy actions.

A. They should tighten monetary policy before inflation surges.

If inflation is currently low but policymakers believe inflation will rise over the next two years with an unchanged stance of monetary​ policy, what should they do to prevent the inflationary​ surge?

A.

They should tighten monetary policy before inflation surges.

B.

They should tighten monetary policy immediately after inflation surges.

C.

They should tighten monetary policy two years after the initial inflation surges.

D.

There is no monetary policy response that can affect inflation.

B. The Fed will conduct open market purchases. (buy bonds)

If the Fed has an​ interest-rate target, why will an increase in the demand for reserves lead to a rise in the money​ supply?

​Hint: The graph to the right shows an increase in the demand for reserves from

Upper R Subscript 1 Superscript d

to

Upper R Subscript 2 Superscript d.

If

i Subscript f f Superscript star

is the​ interest-rate target, what can the Fed do to keep the federal funds rate near its​ target?

Part 2

A.

The Fed will increase the discount rate.

B.

The Fed will conduct open market purchases.

C.

The Fed will conduct open market sales.

D.

The Fed will increase reserve requirements.

D. a policy​ instrument; an intermediate​ target; monetary policy goal

Suppose the central bank sets the growth rate for nonborrowed reserves to​ 3% in order to achieve a growth rate of​ 4% for​ M2, which in turn should grow nominal GDP by​ 5%. In this​ case, nonborrowed reserves are​ _______, M2 is​ ____________, and nominal GDP is a​ _________.

Part 2

A.

a monetary policy​ goal; an intermediate​ target; policy instrument

B.

a policy​ instrument; a policy​ instrument; monetary policy goal

C.

an intermediate​ target; a policy​ instrument; monetary policy goal

D.

a policy​ instrument; an intermediate​ target; monetary policy goal

C. the increase in inflation would prompt the fed funds rate to rise by 1.5 %, and the decrease in the output gap would imply that it would fall by 0.5 %

If

an oil price shock causes the inflation rate to rise by 1 % and output to fall by 1 %​,

what does the Taylor rule imply that policymakers should do to the fed funds​ rate?

Based on this​ scenario, policymakers should

▼

 

INCREASE

the fed funds rate​ because:

A.the increase in inflation would prompt the fed funds rate to fall by 1 %, and the decrease in the output gap would imply that it would rise by 1 %.

the increase in inflation would prompt the fed funds rate to fall by 1 %, and the decrease in the output gap would

imply that it would rise by 1 %.

B.the increase in inflation would prompt the fed funds rate to rise by 1 %, and the decrease in the output gap would imply that it would fall by 1.5 %.

the increase in inflation would prompt the fed funds rate to rise by 1 %, and the decrease in the output gap would

imply that it would fall by 1.5 %.

C.the increase in inflation would prompt the fed funds rate to rise by 1.5 %, and the decrease in the output gap would imply that it would fall by 0.5 %.

the increase in inflation would prompt the fed funds rate to rise by 1.5 %, and the decrease in the output gap would

imply that it would fall by 0.5 %.

D.

changes in

the inflation rate and output

do not influence the fed funds rate.

B: 7.25%

Assume that the equilibrium real federal funds rate is​ 2% and the target for inflation is

2.0​%.

Suppose that the inflation rate is at

4.0​%,

leading to an inflation gap of

2.0​%

​(equal to

4.0​%minus2.0​%),

and real GDP is

0.5​%

above its​ potential, resulting in a positive output gap of

0.5​%.

The Taylor rule suggests that the federal funds rate should be set​ at:

Part 2

A.

5.25​%.

B.

7.25​%.

C.

3.25​%.

D.

6.00​%.