Chapter 17 Monetary Policy and Inflation

| November 9, 2018

1)
If the current level of GDP exceeds full employment, the level of GDP can be
reduced by
A)
reducing taxes.
B)
increasing spending.
C)
reducing the money supply.
D)
lowering interest rates.

2)
An inside lag is
A)
a lag in implementing policy.
B)
the period of time it takes for policies to work.
C)
a policy aimed at increasing GDP.
D)
a policy aimed at reducing GDP.

3)
An outside lag is
A)
a lag in implementing policy.
B)
the period of time it takes for policies to work.
C)
a policy aimed at increasing GDP.
D)
a policy aimed at reducing GDP.

4)
Inside lags are
A)
longer for monetary policy than for fiscal policy.
B)
longer for fiscal policy than for monetary policy.
C)
the same for fiscal policy and monetary policy.
D)
more variable for monetary policy than for fiscal policy.

5)
Outside lags occur because
A)
firms must change investment plans before monetary policy can be effective.
B)
it takes time to identify a problem.
C)
once a problem is diagnosed, it still takes time to implement policy changes.
D)
once changes are finally diagnosed and implemented, policies are immediately
effective.

6)
Which of the following is an example of an expectation of inflation?
A)
Producers expect their prices on average to be higher next year.
B)
Producers expect the prices they pay for raw materials to be higher next year.
C)
Workers expect that the prices they pay for goods and services will be higher
next year.
D)
all of the above

7)
The real rate of interest is defined as the
A)
expected inflation rate minus the nominal interest rate.
B)
expected inflation rate plus the nominal interest rate.
C)
nominal interest rate minus the expected inflation rate.
D)
nominal inflation rate plus the expected inflation rate.

8)
When the expected rate of inflation is added to the real interest rate, the
result is called the
A)
preferred rate.
B)
nominal interest rate.
C)
adjustment rate.
D)
differential rate.

Recall
the Application about the effectiveness of committees in making decisions about
monetary policy to answer the following question(s). Former Fed vice-chairman
Alan Blinder developed an experiment to see whether individuals or groups make
better decisions, and who makes them more rapidly. The experiment tested how
quickly individuals and groups could distinguish changes in underlying trends
from random events, such as if a one-month unemployment rate increase was a
temporary aberration or the possible beginning of a recession, and their
decisions as to changing monetary policy as a reaction to the events.

9)
Recall the Application. If the Federal Reserve was making a decision on
changing interest rates
A)
the chairman, acting alone, would typically make a better decision than the
Board of Governors.
B)
the Board of Governors would typically make a better decision than the chairman
acting on his own.
C)
the Board of Governors would typically make an equally good decision as would
the chairman acting on his own.
D)
neither the Board of Governors nor the chairman, acting alone, would tend to
make accurate predictions.

10)
Recall the Application. The experiment conducted by Blinder showed that the
actual process of having committee meetings and discussions
A)
tended to polarize the group into two distinct factions.
B)
improved the group’s overall performance.
C)
magnified the individual group member’s differences.
D)
related to the average performance of the individual group members.

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