chapter 13

1) The most common definition that monetary policymakers use for price stability is

• A) low and stable deflation

• B) an inflation rate of zero percent.

• C) high and stable inflation

• D) low and stable inflation

2) Price stability is desirable because

• A) inflation creates uncertainty, making it difficult to plan for the future.

• B) everyone is better off when prices are stable.

• C) price stability increases the profitability of the Fed.

• D) it guarantees full employment.

3) Inflation results in

• A) ease of planning for the future

• B) ease of comparing prices over time.

• C) lower nominal interest rates

• D) difficulty interpreting relative price movements.

4) Economists believe that countries recently suffering hyperinflation have experienced

• A) reduced growth.

• B) increased growth.

• C) reduced prices.

• D) lower interest rates.

5) A nominal variable, such as the inflation rate or the money supply, which ties down the price level to achieve price stability is called ________ anchor.

• A) a nomina

• B) a real

• C) an operating

• D) an intermediate

6) 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.

7) 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 an

• A) operating target, such as the federal funds interest rate

• B) intermediate target, such as the federal funds interest rate.

• C) intermediate target to achieve an ultimate goal such as price stability

• D) operating target to achieve an ultimate goal such as exchange rate stability

8) A nominal anchor promotes price stability by

• A) outlawing inflation.

• B) stabilizing interest rates

• C) keeping inflation expectations low.

• D) keeping economic growth low.

9) Monetary policy is considered time-inconsistent because

• A) of the lag times associated with the implementation of monetary policy and its effect on the economy

• B) policymakers are tempted to pursue discretionary policy that is more contractionary in the short run

• C) policymakers are tempted to pursue discretionary policy that is more expansionary in the short run.

• D) of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy.

10) The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule

• A) inflation rate

• B) unemployment rate

• C) interest rate

• D) foreign exchange rate