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Chapter 20

792Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh EditionChapter 21Monetary Policy Strategy: The International Experience793

Chapter 21Monetary Policy Strategy: The International Experience

(Multiple Choice

1) Overly expansionary monetary policy

(a) leads to high inflation.

(b) decreases the efficiency of the economy.

(c) hampers economic growth.

(d) does all of the above.

(e) does only (a) and (b) of the above.

Question Status: Previous Edition

2) Overly expansionary monetary policy

(a) leads to high inflation.

(b) can produce serious recessions.

(c) leads to deflation.

(d) does all of the above.

(e) does only (a) and (b) of the above.

Question Status: Previous Edition

3) Overly expansionary monetary policy

(a) decreases the efficiency of the economy.

(b) hampers economic growth.

(c) leads to deflation.

(d) all of the above.

(e) does only (a) and (b) of the above.

Question Status: Previous Edition

4) Overly expansionary monetary policy

(a) leads to deflation.

(b) decreases the efficiency of the economy.

(c) can produce serious recessions.

(d) does all of the above.

(e) does only (a) and (b) of the above.

Question Status: Previous Edition

5) Monetary policy that is too tight can

(a) produce serious recessions in which output falls and unemployment rises.

(b) lead to deflation, which, in turn, can help trigger financial crises.

(c) lead to inflation, which decreases the efficiency of the economy.

(d) do all of the above.

(e) do only (a) and (b) of the above.

Question Status: Previous Edition

6) Monetary policy that is too tight can

(a) produce serious recessions in which output falls and unemployment rises.

(b) lead to inflation, which, in turn, can help trigger financial crises.

(c) lead to inflation, which decreases the efficiency of the economy.

(d) do all of the above.

(e) do only (a) and (b) of the above.

Question Status: Previous Edition

7) 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.

Question Status: Previous Edition

8) A central feature of monetary policy strategies in all countries is the use of a nominal anchor, which is a nominal variable that monetary policymakers use as

(a) an operating target, such as the federal funds interest rate.

(b) an intermediate target, such as the federal funds interest rate.

(c) an intermediate target to achieve an ultimate goal such as price stability.

(d) an operating target to achieve an ultimate goal such as exchange rate stability.

Question Status: Previous Edition

9) A nominal anchor

(a) is a necessary element in successful monetary policy strategies.

(b) is a nominal variable that monetary policymakers use as intermediate target to achieve an ultimate goal such as price stability.

(c) forces a nations monetary authority to keep the price level from growing or falling too fast.

(d) is all of the above.

(e) is only (a) and (b) of the above.

Question Status: Previous Edition

10) A nominal anchor

(a) can help promote price stability.

(b) is a necessary element in successful monetary policy strategies.

(c) forces a nations monetary authority to keep the price level from growing or falling too fast.

(d) can do all of the above.

(e) can do only (a) and (b) of the above.

Question Status: Previous Edition

11) Economic variables that can serve as a nominal anchor for monetary policy include

(a) the exchange rate.

(b) the inflation rate.

(c) the federal budget deficit.

(d) all of the above.

(e) both (a) and (b) of the above.

Question Status: New

12) Economic variables that can serve as a nominal anchor for monetary policy include

(a) the exchange rate.

(b) the inflation rate.

(c) the money supply.

(d) all of the above.

(e) both (a) and (b) of the above.

Question Status: New

13) Economic variables that can serve as a nominal anchor for monetary policy include

(a) the unemployment rate.

(b) the inflation rate.

(c) the federal budget deficit.

(d) all of the above.

(e) both (a) and (b) of the above.

Question Status: New

14) A nominal anchor promotes price stability by

(a) outlawing inflation.

(b) stabilizing interest rates.

(c) keeping inflation expectations low.

(d) keeping economic growth low.

(e) all of the above.

Question Status: New

15) 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-consistency problem.

(d) nominal-anchor problem.

Question Status: Revised

16) 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-consistency

(c) nominal-anchor

(d) rational-expectation

Question Status: Revised

17) 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.

Question Status: Previous Edition

18) The time-consistency problem in monetary policy can occur when the central bank conducts policy

(a) using a nominal anchor.

(b) using a strict and an inflexible rule.

(c) on a discretionary, day-by-day basis.

(d) using a flexible, discretionary rule.

Question Status: Revised

19) In the face of rising unemployment, a central bank that conducts monetary policy on a discretionary, day-by-day basis may be tempted to pursue monetary policy that is more expansionary than they had announced. If the policy leads to high inflation with no reduction in unemployment it is because

(a) workers and firms, knowing that the central bank has discretion, raised their expectations of prices, wages, and inflation.

(b) the monetary anchor proved to be an inaccurate indicator of the direction of inflation.

(c) of both of the above reasons.

(d) of neither of the above reasons; it was simply bad luck.

Question Status: Previous Edition

20) A professor tells his students that if they do not do well on the midterm exam, he will assign a ten-page research paper. Students are likely to be skeptical because

(a) they know that the professor may renege to avoid the extra work of grading the papers.

(b) they have been covering moral hazard and adverse selection problems in financial markets.

(c) of both of the above reasons.

(d) of neither of the above reasons.

Question Status: Previous Edition

21) The discrepancy between announcements (what policymakers say they are going to do) and actions (what they subsequently in fact do) is called

(a) moral hazard.

(b) bait-and-switch.

(c) time consistency.

(d) nominal-anchor consistency.

Question Status: Revised

22) If the central bank conducts monetary policy on a discretionary, day-by-day basis and announces a policy of low inflation

(a) workers and firms will almost certainly believe the announcement, because they know that the central bank does not want to lose credibility.

(b) workers and firms will likely doubt the announcement, because they know that the central bank does not want to lose credibility.

(c) workers and firms will be skeptical of the announcement, because they know that the central bank may want to renege if economic conditions change.

(d) workers and firms will not believe the announcement, because they know that the central bank will not want low inflation if unemployment rises.

Question Status: Revised

23) A central bank may pursue a discretionary policy resulting in high inflation

(a) because a low-inflation policy is not desirable.

(b) in response to political pressure.

(c) because a high-inflation policy increases output.

(d) all of the above.

(e) both (a) and (c) of the above.

Question Status: New

24) A central bank may pursue a discretionary policy resulting in high inflation

(a) because central banks think this policy will lower unemployment.

(b) in response to political pressure.

(c) because a high-inflation policy increases output.

(d) all of the above.

(e) both (a) and (b) of the above.

Question Status: New

25) Targeting the exchange rate can take the form of fixing the value of the domestic currency

(a) to a commodity such as gold.

(b) to that of a large, low-inflation country.

(c) to that of a country that has a higher inflation rate than the domestic country.

(d) to any of the above.

(e) to only (a) and (b) of the abov