Monetary Policy Quiz

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

• low and stable deflation.

• an inflation rate of zero percent.

• high and stable inflation.

• low and stable inflation.

Price stability is desirable because

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

• everyone is better off when prices are stable.

• price stability increases the profitability of the Fed.

• it guarantees full employment.

Inflation results in

• ease of planning for the future.

• ease of comparing prices over time.

• lower nominal interest rates.

• difficulty interpreting relative price movements.

Economists believe that countries recently suffering hyperinflation have experienced

• reduced growth.

• increased growth.

• reduced prices.

• lower interest rates.

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 nominal

• a real

• an operating

• an intermediate

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

• anchor.

• benchmark.

• tether.

• guideline.

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

• operating target, such as the federal funds interest rate.

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

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

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

A nominal anchor promotes price stability by

• outlawing inflation.

• stabilizing interest rates.

• keeping inflation expectations low.

• keeping economic growth low.

Monetary policy is considered time-inconsistent because

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

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

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

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

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.

• inflation rate

• unemployment rate

• interest rate

• foreign exchange rate