1.

All of the following central banks have announced numerical targets for inflation EXCEPT the: OK United States Federal Reserve System. Bank of Canada. Bank of England. Central Bank of Brazil. Reserve Bank of New Zealand 2. A reduction in the Fed's target inflation rate is equivalent to: an adverse inflation shock. a favorable inflation shock. a shock to potential output. OK an upward (leftward) shift in the Fed's monetary policy reaction function. a downward (rightward) shift in the Fed's monetary policy reaction function. 3. If inflation equals zero, then a worker's real wage will fall when: the nominal wage increases. OK the nominal wage decreases. the nominal wage is constant. the nominal wage increase, decreases, or remains constant. relative prices increase. 4. In order to determine whether a temporary bulge in inflation has shifted inflationary expectation, the Federal Reserve can monitor: real interest rates. nominal interest rates. OK the core rate of inflation. GDP. the unemployment rate. 5. An inflation dove is someone who easily anchors inflation expectations. OK is not strongly committed to maintaining low inflation. is committed to maintaining low inflation even at the cost of reduced output and employment. believes monetary policy is more powerful than fiscal policy. encourages preemptive policy strikes. 6. Based on the figure, assume that the economy starts initially at a long-run equilibrium at point A in the aggregate demand-aggregate supply diagram and at point F on monetary policy reaction function (MPRF1). If the Federal Reserve lowers its long-run inflation target from 8 percent to 3 percent, then when the long-run equilibrium is restored, output will be _____ and the real interest rate will be _____. YES Y*; 5 percent Y1; 7 percent NO Y1; 5 percent Y1; 2 percent Y2; 5 percent Feedback For more information, see p. 457 of your textbook. 7. Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to keep inflation from becoming permanently higher. increase the target inflation rate. decrease the target inflation rate. OK maintain the initial target inflation rate.

8.

shift the short-run aggregate supply curve up. shift the short-run aggregate supply curve down. The inside lag is relatively shorter for _____ policy and the outside lag is

relatively shorter for _____ policy. OK monetary; fiscal monetary; monetary monetary; structural fiscal; fiscal fiscal; monetary 9. Anchored inflationary expectations are people's expectations of future inflation that: increase if inflation rises temporarily. decrease if inflation rises temporarily. OK do not change if inflation rises temporarily. are based on the level of potential output. are based on the unemployment rate. 10. If the central bank moves to reduce the inflation rate in an economy that is initially at long-run equilibrium, then in the short-run the inflation rate _____ and in the long-run the inflation rate ____. increases; increases NO decreases; declines shows little change; increases YES shows little change; declines increases; decreases Feedback For more information, see p. 457 of your textbook. 1. Suppose the monetary policy reaction function has the following form: r= .03 + 1.0 (p- .08), where r equals the real interest rate and p equals the inflation rate. If the central bank wishes to follow of a policy of disinflation and reduce the target inflation rate to 2 percent (.02), then the new monetary policy reaction function should be of the following form: r= .03 + 1.0 (p - .08). r=.02 + 1.0 (p - .08). NO r= .03 + .02 (p - .08). YES r= .03 + 1.0 (p - .02). r= (.03+.02) + 1.0 (p - .08). Feedback For more information, see p. 457 of your textbook. 2. All of the following central banks have announced numerical targets for inflation EXCEPT the: OK United States Federal Reserve System. Bank of Canada. Bank of England. Central Bank of Brazil. Reserve Bank of New Zealand 3. If inflation equals zero, then a worker's real wage will fall when: the nominal wage increases. OK the nominal wage decreases. the nominal wage is constant. the nominal wage increase, decreases, or remains constant. relative prices increase. 4. A downward (rightward) shift in the Fed's monetary policy reaction function is equivalent to:

an adverse inflation shock. a favorable inflation shock. a shock to potential output. a reduction in the Fed's target inflation rate. OK an increase in the Fed's target inflation rate. 5. An argument against a central bank policy of announcing numerical inflation targets is that inflation targeting policies: enhance central bank credibility. anchor inflationary expectations. OK emphasize inflation at the expense of output stabilization. increase uncertainty. increase central bank flexibility in response to shocks. 6. Based on the figure assume the economy is initially at a long-run equilibrium at point A in the aggregate demand-aggregate supply diagram and at point E on the monetary policy reaction function (MPRF1) with Y=Y*, r=r*, and p=p*1. A decrease in spending shifts the aggregate demand curve from AD1 to AD2. If the Fed acts preemptively to lower its target interest rate to prevent a decrease in inflation, the change will be represented by a move from E to ___ and from C to ____ in the figure. OK F; A F; D H; A H; D E; A 7. Shocks to aggregate demand _____ require the Fed to choose between inflation and output stability, while shocks to aggregate supply ____ require the Fed to choose between inflation and output stability. NO do; do do; do not may or may not; may or may not YES do not; do do not; do not Feedback For more information, see p. 463 of your textbook. 8. Announced numerical inflation targets are advocated for all of the following reasons EXCEPT that inflation targets: reduce inflation uncertainty. anchor inflationary expectations. enhance central bank credibility. OK eliminate the tradeoff between maintaining output or inflation in the event of adverse inflationary shocks. are appropriate since central banks can control long-run inflation. 9. The situation in which central bankers are insulated from short-term political considerations and are allowed to take a long-term view of the economy is called: being an inflation dove. being an inflation hawk. the outside lag of monetary policy. the inside lag of monetary policy. OK central bank independence. 10. The short-run costs of disinflation are a(n) _____ gap and _____ unemployment. expansionary; higher expansionary; lower expansionary; no change in

OK

recessionary; higher recessionary; lower

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