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Economics > Econ Test 3 - Monetary Policy Theory > Flashcards

Econ Test 3 - Monetary Policy Theory Flashcards

0
Q

What level does the central bank try to maintain inflation close to?

A

inflation target

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1
Q

What is the central goal of central banks?

A

Price stability

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2
Q

Monetary policy should try to minimize the difference between what?

A

Inflation and the inflation target

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3
Q

The difference between inflation and the inflation target

A

inflation gap

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4
Q

Central banks also care about:

A

stabilizing economic activity

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5
Q

Monetary policymakers want to have aggregate output close to what?

A

its potential level

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6
Q

Central banks want to minimize the difference between aggregate ouput and what?

A

potential output

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7
Q

An aggregate demand shock with no policy response shifts the demand curve

A

leftward

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8
Q

An aggregate demand shock with no policy response does what to output and inflation

A

decreases output

decreases inflation

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9
Q

The disruption to financial markets starting in August 2007 that increased financial frictions and caused spending to fall is an example of?

A

aggregate demand shock

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10
Q

In the case of aggregate demand shocks, what’s the tradeoff between the pursuit of price stability and economic activity stability?

A

there is no tradeoff

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11
Q

An aggregate demand shock with a policy that stabilizes in the short run does what to the aggregate demand curve?

A

the curve shifts leftward

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12
Q

An aggregate demand shock with no policy affects inflation how?

A

decreased permanently

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13
Q

When the aggregate demand curves shifts left what happens to output and inflation?

A

decreases

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14
Q

Aggregate demand shock with a policy does what to the inflation?

A

shifts the aggregate demand curve back and inflation stabilizes

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15
Q

No conflict exists between the dual objectives of stabilizing inflation and economic activity is referred to as what?

A

divine coincidence

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16
Q

Who coined the term divine coincidence?

A

Olivier Blanchard

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17
Q

How are monetary authorities able to keep inflation at the target inflation rate and stabilize inflation?

A

decreasing aggregate demand

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18
Q

A decrease in aggregate demand will affect inflation how?

A

Keep inflation at the target rate and stabilize inflation

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19
Q

Keeping the inflation gap at zero leads to what in the output gap?

A

zero output gap

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20
Q

What two objectives are referred to in the divine coincidence?

A

stabilizing inflation

economic activity

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21
Q

The term for no conflict existing between the dual objectives of stabilizing inflation and economic activity is?

A

divine coincidence

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22
Q

A permanent negative supply shock with no policy response shifts the long-run aggregate supply curve which way?

A

left

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23
Q

A permanent negative supply shock with no policy response shifts the short-run aggregate supply curve where?

A

upward

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24
Q

A negative supply shock with no policy response does what to the economy?

A

Shifts it back to long-run equilibrium with output falling and inflation rising

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25
Q

A permanent negative supply shock with a policy shifts the long-run aggregate supply curve where?

A

left

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26
Q

When might the divine coincidence not hold up?

A

when a supply shock is temporary, such as when the price of oil surges

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27
Q

When policymakers face a short-run tradeoff between stabilizing inflation and economic activity what is occuring?

A

divine coincidence is not holding up

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28
Q

A temporary negative supply shock with no policy response shifts the aggregate supply where?

A

upward

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29
Q

A temporary negative supply shock with no positive response does what to inflation and output?

A

increase inflation

decrease output

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30
Q

A temporary negative supply shock with no policy response does what to inflaction and econ activity in the long run?

A

stabilizes

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31
Q

A temporary negative supply shock with a policy response shifts the aggregate supply curve where?

A

upward

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32
Q

A temporary negative supply shock with a policy response does what to output and inflation?

A

decrease output

nothing to inflation

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33
Q

After the supply curve shifts upwards due to a temporary negative supply shock with a policy response the next step is for the supply curve to shift?

A

downward

34
Q

These economists believe wages and prices are very flexible, so the self-correcting mechanism is very rapid

A

nonactivists

35
Q

These economists regard the self-correcting mechanism through wage and price adjustment as very slow

A

Activists

36
Q

Why do activists regard the self-correcting mechanism through wage and price adjustments as very slow?

A

because the wages and prices are sticky

37
Q

What are activists commonly referred to as?

A

Kenesians

38
Q

What economists see the need for the government to pursue active policy to eliminate high unemployment when it develops?

A

Activists or keynesians

39
Q

Why do activists see the need for the government to pursue active policy?

A

to eliminate high unemployment when it develops

40
Q

What are the 5 types of lag?

A 
data
recognition
legislative
implementation
effectiveness
41
Q

What is the time it takes for policymakers to obtain data indicating what is happening in the economy?

A

data lag

42
Q

What is the time it takes for policymakers to be sure of what the data are signaling about the future course of the economy?

A

recognition lag

43
Q

What represents the time it takes to pass legislation to implement a particular policy?

A

legislative lag

44
Q

What is the time it takes for policymakers to change policy instruments once they have decided on the new policy?

A

implementation lag

45
Q

What is the time it takes for the policy to actually have an impact on the economy?

A

effectiveness lag

46
Q

Accurate data on the GDP not being available until several months later is an example of?

A

data lag

47
Q

When the National Bureau of Economic Research doesn’t declare a recession until six months later in order to minimize errors what is this called?

A

recognition lag

48
Q

What is the legislative lag important for?

A

implementation of fiscal policy

49
Q

Why is legislative lag important for implementation of fiscal policy?

A

it can sometimes take six months to year to pass legislation to changes taxes or policies

50
Q

What two lag’s are more important towards fiscal policy than they are towards monetary policy?

A

legislative

implementation

51
Q

How would you describe the effectiveness lag?

A

Long and variable

52
Q

The monetary authorities can target any inflation rate in the long run with what?

A

autonomous policy adjustments

53
Q

Autonomous policy adjustments can be used for what?

A

target inflation rates

54
Q

Potential output is independent of what?

A

Monetary policy

55
Q

The quantity of aggregate output produced in the long run is what?

A

potential output

56
Q

What is the primary goal of most governments?

A

high employment

57
Q

The pursuit of high employment can bring about what?

A

high inflation

58
Q

This results either from a temporary negative supply shock or a push by workers for wage hikes beyond what productivity gains can be justified?

A

cost-push inflation

59
Q

This results from policymakers pursuing policies that increase aggregate demand?

A

demand-pull inflation

60
Q

Demand-pull inflation results from what?

A

policymakers pursuing policies that increase aggregate demand

61
Q

Cost-push inflation results from what?

A

either a temporary negative supply shock or a push by workers for wage hikes

62
Q

The cost-push shock acts like what?

A

a temporary negative supply shock

63
Q

The cost-push shock does what to inflation rates?

A

raises them

64
Q

When output falls and unemployment increases what happens to inflation?

A

rise

65
Q

When policymakers increase aggregate demand in response to a temporary supply shock what happens to output and unemployment?

A

output falls

unemployment rises

66
Q

Why is some unemployment always present?

A

because of frictions in the labor market

67
Q

When would we normally expect to see demand-pull inflation?

A

when unemployment is below the natural rate level

68
Q

What are the two types of inflation that can result from an activists stabilization policy promoting high employment?

A

cost-push inflation

demand-pull inflation

69
Q

What inflation occurs when unemployment is above the natural rate level?

A

cost-push inflation

70
Q

Cost-push inflation occurs when?

A

when unemployment is above the natural rate level

71
Q

Can a cost-pull inflation be initiated by a demand-pull inflation?

A

Yes

72
Q

Too low an unemployment target causes the government to do what to aggregate demand?

A

increase

73
Q

An increase in aggregate demand does what to the AD curve?

A

shifts it right

74
Q

Because unemployment rate is below the natural rate level, wages will do what?

A

rise

75
Q

When wages rise the short-run aggregate supply cruve will shift where?

A

up and left

76
Q

A cost-push shock shifts the short-run aggregate supply curve where?

A

up and left

77
Q

For aggregate demand shocks and permanent supply shocks the price stability and economic activity stability objectives are?

A

consistent

78
Q

When is there a tradeoff between stabilizing inflation and stabilizing economic activity?

A

in the short run

79
Q

When is there not a tradeoff between stabilizing inflation and stabilizing economic activity?

A

long run

80
Q

How can policymakers target any inflation rate in the long run?

A

through autonomous monetary policy

81
Q

Autonomous monetary policy adjusts what?

A

the equilibrium real interest rate

82
Q

How does autonomous monetary policy adjust the equilibrium real interest rate?

A

uses federal funds rate policy tool to change the level of aggregate demand

83
Q

What inflation led to the Great Inflation fro 1965 to 1982?

A

both inflations

Economics (5 decks)

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