Macroeconomics - Chapter 13

Front 1

1. Which of the following is most likely to be an ultimate target for monetary policy?
a) short term interest rates
b) reserve ratios
c) the inflation rate
d) exchange rates
e) stock market indexes, such as the S&P 500

Back 1

c) the inflation rate

Front 2

2. Which of the following is most likely to be an intermediate target for monetary policy?
a) short term interest rates
b) the unemployment rate
c) investment expenditures
d) gross domestic product
e) the money supply

Back 2

e) the money supply

Front 3

3. For central banks, short term interest rates are likely to be
a) long run policy targets
b) intermediate-term targets
c) operational instruments
d) taken as exogenously determined
e) irrelevant to policy making

Back 3

c) operational instruments

Front 4

4. In the Keynesian model,
a) the IS curve shows all points of informational symmetry between buyers and sellers
b) the IS curve represents international symbiosis between economies
c) the LM curve shows equilibrium positions in the goods market
d) the LM curve gives the locus of points at which imports equal exports
e) the LM curve shows where the supply and demand for money are equal

Back 4

e) the LM curve shows where the supply and demand for money are equal

Front 5

5. The horizontal and vertical axes of the LM curve diagram represent, respectively,
a) the quantity of money and the price level
b) the quantity of money and the interest rate
c) real GDP and the interest rate
d) real GDP and the price level
e) the unemployment rate and the inflation rate

Back 5

c) real GDP and the interest rate

Front 6

6. The LM curve slopes upward because
a) as income rises, the demand for money begins to exceed its supply
b) as interest rates rise, the demand for money rises
c) as the price level rises, the velocity of money increases
d) as the money supply rises, the inflation rate increases
e) as the demand for money rises, the supply of money is increased

Back 6

a) as income rises, the demand for money begins to exceed its supply

Front 7

7. A reduction in the money supply
a) reduces both interest rates and GDP
b) pushes the LM curve down
c) pushes the LM curve inward
d) shifts the IS curve outward
e) flattens the slope of the LM curve

Back 7

c) pushes the LM curve inward

Front 8

8. Suppose that as sales of goods shift from bricks-and-mortar stores to the internet, the
transactions demand for cash declines. Then in the absence of any other changes,
a) the IS curve shifts outward
b) the LM curve shifts inward
c) the velocity of money will adjust to keep GDP constant
d) interest rates will fall and GDP will increase
e) interest rates will rise and investment will decline

Back 8

d) interest rates will fall and GDP will increase

Front 9

9. Central banks commonly aim to keep the price level
a) declining slightly
b) perfectly constant
c) growing by about 1% per year
d) rising by about 2% per year
e) increasing by about 5% per year

Back 9

d) rising by about 2% per year

Front 10

10. Setting a target of zero for the inflation rate may be sub-optimal because
a) measured inflation is an overestimate, so zero measured inflation effectively
implies deflation
b) the redistributive effects of unexpected inflation are Pareto efficient
c) a stagnant price level precludes the possibility of economic growth
d) deflation encourages investment, so the target rate for inflation should be negative
e) all of the above

Back 10

a) measured inflation is an overestimate, so zero measured inflation effectively
implies deflation

Front 11

11. A low, positive rate of price inflation
a) allows real wages to rise when nominal wages are sticky
b) allows real interest rates to become negative when nominal interest rates fall to
zero
c) allows unemployment to remain below the natural rate indefinitely
d) allows firms to make economic profits even in perfectly competitive markets
e) prevents the public from forming expectations regarding the price level

Back 11

b) allows real interest rates to become negative when nominal interest rates fall to
zero

Front 12

12. In practice, effective deflation
a) occurs when the inflation rate is less than 5%
b) requires the inflation rate to be less than or equal to negative one percent
c) occurred more often in the final 3 decades of the 20th
century than it has since
d) is more prevalent among Latin American countries than elsewhere
e) is a relatively rare phenomenon

Back 12

e) is a relatively rare phenomenon

Front 13

13. Which of the following is the most appropriate model for a central bank conducting
discretionary stabilization policy?
a) observe what the unemployment rate has been in recent periods, estimate the
difference from the natural rate, and adjust the money supply accordingly
b) observe the current level of GDP, estimate the output gap between actual and
potential GDP, and adjust bank reserve requirements accordingly
c) observe the past and current trade-weighted exchange rate, estimate the difference
from purchasing power parity, and adjust income taxes accordingly
d) predict the future inflation rate based on current and recent trends in economic
variables, estimate the difference from the target rate, and tighten or loosen
lending accordingly
e) disregard current trends and simply keep the money supply growing at a rate equal to
the long run growth rate of GDP

Back 13

d) predict the future inflation rate based on current and recent trends in economic
variables, estimate the difference from the target rate, and tighten or loosen
lending accordingly

Front 14

14. Which of the following characterizes intermediate targeting by central banks?
a) the Federal Reserve targets short term interest rates
b) the European Central Bank targets exchange rates
c) the Bank of England targets inflation
d) increasingly, central banks are exclusively targeting the money supply
e) increasingly, central banks are abandoning the use of explicit targets

Back 14

c) the Bank of England targets inflation

Front 15

15. According to the simple Quantity Theory of Money, if velocity is constant and real GDP
grows by 2% per year, then money supply growth of 3% per year generates
a) an interest rate of 1%
b) an inflation rate of 1%
c) an unemployment rate of 1%
d) an exchange rate of 1%
e) an output gap of 1%

Back 15

b) an inflation rate of 1%

Front 16

16. According to the Quantity Theory of Money, if velocity is rising by 1% per year and real
GDP growth is 2.5% per year, then maintaining an annual inflation rate of 1.5% would
require annual money supply growth of
a) zero percent
b) 1%
c) 2%
d) 3%
e) 4%

Back 16

d) 3%

Front 17

17. Using the money supply as the exclusive intermediate target for policy purposes has
fallen out of favor for all but which of the following reasons?
a) the velocity of money is unpredictable
b) the various monetary aggregates often send conflicting signals
c) the decision lag for setting money supply targets is too long
d) there is no reliable formula relating changes in interest rates to changes in the money
supply
e) raising interest rates may reduce GDP rather than reducing inflation

Back 17

c) the decision lag for setting money supply targets is too long

Front 18

18. Which of the following events or trends from the 1970s and 1980s does not help to
explain the failure of using monetary aggregates as intermediate targets?
a) oil price shocks
b) the creation of new monetary instruments which brought about new, broader measures
of the money supply
c) the invention of automatic teller machines
d) legislative and regulatory changes allowing increased financial competition
e) the widespread adoption of computers throughout the banking industry

Back 18

e) the widespread adoption of computers throughout the banking industry

Front 19

19. If a central bank targets the exchange rate, it
a) enhances its ability to achieve full employment
b) raises interest rates whenever the currency appreciates
c) reduces interest rates in order to force its currency to appreciate
d) achieves the same inflation rate as the target country
e) stabilizes GDP by stabilizing net exports

Back 19

d) achieves the same inflation rate as the target country

Front 20

20. Italy and the United Kingdom abandoned their exchange rate targets in 1992 because
a) they had achieved their goal of stabilizing output
b) they replaced their domestic currencies with the Euro
c) all the other European countries did the same
d) Germany raised interest rates to fight inflation, but concomitant tightening
exacerbated recession in Italy and the UK
e) productivity shocks in Italy and the UK created unexpected currency appreciations
too often to counteract successfully with monetary policy

Back 20

d) Germany raised interest rates to fight inflation, but concomitant tightening
exacerbated recession in Italy and the UK

Front 21

21. Which of the following is not a valid reason for adopting inflation targeting?
a) policy rules are often too restrictive
b) discretionary policy can reduce credibility
c) constrained discretion operates with excessive lags
d) inflation targeting provides flexibility for dealing with shocks
e) inflation targeting examines trends in several variables, whereas policy rules use
limited information

Back 21

c) constrained discretion operates with excessive lags

Front 22

22. Which of the following is true of inflation targeting?
a) it is conducted with openness rather than secrecy
b) it is a specific policy rule
c) it restricts policymakers’ attention to one easily identified variable
d) it is a form of monetarism which relies on a relatively narrow interpretation of the
Quantity Theory
e) though theoretically legitimate, it has not been adopted in practice by any major
central banks

Back 22

a) it is conducted with openness rather than secrecy

Front 23

23. Inflation targeting most commonly consists of
a) a 6 month goal of 6% inflation in consumer prices
b) a 9 month goal of 4% inflation in consumer prices
c) a 1 to 2 year goal of 2% to 3% inflation in consumer prices
d) a 1 to 2 year goal of zero inflation, plus-or-minus 1%, in producer prices
e) a 5 year goal of 3% to 5% inflation in producer prices

Back 23

c) a 1 to 2 year goal of 2% to 3% inflation in consumer prices

Front 24

24. The monetary base consists of
a) gold and silver
b) gold plus currency
c) coins, currency, and demand deposits
d) currency and bank reserves
e) M3 – M1

Back 24

d) currency and bank reserves

Front 25

25. Which of the following is not a mechanism through which central banks can ordinarily
provide increased liquidity to the economy?
a) printing currency
b) purchases of government securities from member banks
c) reducing reserve requirements
d) increased lending through the discount window
e) all of the above mechanisms are available to the central bank for providing liquidity,
and all are routinely used

Back 25

a) printing currency

Front 26

26. Open market operations refer to
a) all economic transactions not undertaken on the black market
b) imports and exports of goods
c) international currency transactions
d) central banks holding reserves and lending to member banks
e) the purchase and sale of treasury securities by central banks

Back 26

e) the purchase and sale of treasury securities by central banks

Front 27

27. When the central bank undertakes an open market purchase,
a) the national debt increases
b) bank reserves decrease
c) interest rates rise
d) the money supply increases
e) the monetary base declines

Back 27

d) the money supply increases

Front 28

28. Which of the following would reduce short term interest rates?
a) the issuance of new government bonds by the central bank
b) a sale of bonds by the central bank
c) an increase in discount window lending
d) an increase in reserve requirements
e) a tighter credit policy by banks

Back 28

c) an increase in discount window lending

Front 29

29. If the central bank targets the money supply, it will
a) provide increased liquidity when the demand for money rises
b) raise interest rates to encourage lending whenever banks hold excess reserves
c) conduct open market sales of securities whenever the demand for money falls
d) allow interest rates to rise when the demand for money rises
e) not act to offset credit tightening by banks

Back 29

d) allow interest rates to rise when the demand for money rises

Front 30

30. Targeting interest rates and targeting the money supply are equivalent if
a) money demand is stable
b) banks hold no excess reserves
c) exchange rates are fixed
d) central banks practice inflation targeting
e) consumers exhibit rational expectations

Back 30

a) money demand is stable

Front 31

31. Higher short term interest rates can be used to prevent inflation because they
a) discourage saving
b) increase the debt-service expense for the government
c) cause the country’s currency to depreciate on the world market
d) enhance consumer confidence
e) discourage investment

Back 31

e) discourage investment

Front 32

32. The credit channel refers to
a) changes in bank lending which result from monetary policies
b) the interest rate linkage between monetary policy and corporate investment
c) direct lending by the central bank to private banks d) money market effects on exchange rates
e) the relationships among private banks acting cooperatively rather than competitively

Back 32

a) changes in bank lending which result from monetary policies

Front 33

33. A 1% increase in the fed funds rate, an overnight inter-bank rate often targeted by the
Federal Reserve, is most likely to cause
a) a 1% increase in prices within a year
b) a nearly instantaneous increase in output and a reduction in unemployment
c) a 1% increase in the money supply (M1) over a two-year period
d) gradual reductions in the money supply, inflation, output, and employment
e) other interest rates throughout the economy to fall by about 1%

Back 33

d) gradual reductions in the money supply, inflation, output, and employment

Front 34

Suppose the central bank follows the Taylor Rule

nominal interest rate = .03 + .5(output gap) + 1.5(inflation rate - .02).

34. For an economy at full employment with an inflation rate of .04, the central bank will set
its nominal interest rate equal to
a) .03
b) .05
c) .06
d) .065
e) .09

Back 34

c) .06

Front 35

Suppose the central bank follows the Taylor Rule

nominal interest rate = .03 + .5(output gap) + 1.5(inflation rate - .02).

35. The real interest rate will be approximately
a) -.01
b) .02
c) .025
d) .05
e) .07

Back 35

b) .02

Front 36

36. If the central bank follows the Taylor Rule
nominal interest rate = .04 + α(output gap) + β (inflation rate - .03)
where α = 0 and β = 1, then each of the following is true except
a) the real interest rate will remain approximately one percent
b) the central bank has a three percent inflation target
c) the policy rule excludes any consideration of employment and/or GDP
d) the nominal interest rate will be at least four percent
e) in the face of one percent deflation, the central bank would cut its nominal interest
rate to zero

Back 36

d) the nominal interest rate will be at least four percent

Front 37

37. If the nominal interest rate is currently .03 and the central bank follows the rule
nominal interest rate = .03 + .5(output gap) + 1.5(inflation rate - .04),
then it will leave nominal rates unchanged in each of the following cases except
a) full employment with four percent inflation
b) a three percent output gap and three percent inflation
c) a supply shock causing six percent inflation and a negative output gap of six percent
d) a technology jump causing a fifteen percent output gap and one percent deflation
e) a two percent output gap and two percent inflation

Back 37

e) a two percent output gap and two percent inflation

Front 38

38. Quantitative Easing refers to
a) A dramatic increase in M2 when interest rates are at or close to zero
b) Cutting interest rates to zero
c) Printing cash to finance government expenditure
d) A dramatic increase in M0 when interest rates are at or close to zero
e) Printing cash to finance tax cuts

Back 38

d) A dramatic increase in M0 when interest rates are at or close to zero

Front 39

39. Which of the following is not a mechanism through which Quantitative Easing (QE)
could affect the wider economy
a) An announcement effect whereby the mere announcement of a QE programme
influences expectations and causes individuals to alter their spending and saving
decisions.
b) A direct spending effect whereby cash given to individuals increases their
spending
c) An excess M0 effect whereby banks are more willing to lend when their cash balances
are large
d) An asset price effect whereby assets purchased through the QE programme tend to
rise in price and so influence borrowing and lending decisions in the economy
e) An inflation expectations effect whereby QE raises expectations of future inflation.

Back 39

b) A direct spending effect whereby cash given to individuals increases their
spending