Econ Test 3 - Monetary Policy Theory

Question 0

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

Answer 0

inflation target

Question 1

What is the central goal of central banks?

Answer 1

Price stability

Question 2

Monetary policy should try to minimize the difference between what?

Answer 2

Inflation and the inflation target

Question 3

The difference between inflation and the inflation target

Answer 3

inflation gap

Question 4

Central banks also care about:

Answer 4

stabilizing economic activity

Question 5

Monetary policymakers want to have aggregate output close to what?

Answer 5

its potential level

Question 6

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

Answer 6

potential output

Question 7

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

Answer 7

leftward

Question 8

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

Answer 8

decreases output

decreases inflation

Question 9

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

Answer 9

aggregate demand shock

Question 10

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

Answer 10

there is no tradeoff

Question 11

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

Answer 11

the curve shifts leftward

Question 12

An aggregate demand shock with no policy affects inflation how?

Answer 12

decreased permanently

Question 13

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

Answer 13

decreases

Question 14

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

Answer 14

shifts the aggregate demand curve back and inflation stabilizes

Question 15

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

Answer 15

divine coincidence

Question 16

Who coined the term divine coincidence?

Answer 16

Olivier Blanchard

Question 17

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

Answer 17

decreasing aggregate demand

Question 18

A decrease in aggregate demand will affect inflation how?

Answer 18

Keep inflation at the target rate and stabilize inflation

Question 19

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

Answer 19

zero output gap

Question 20

What two objectives are referred to in the divine coincidence?

Answer 20

stabilizing inflation

economic activity

Question 21

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

Answer 21

divine coincidence

Question 22

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

Answer 22

left

Question 23

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

Answer 23

upward

Question 24

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

Answer 24

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

Question 25

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

Answer 25

left

Question 26

When might the divine coincidence not hold up?

Answer 26

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

Question 27

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

Answer 27

divine coincidence is not holding up

Question 28

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

Answer 28

upward

Question 29

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

Answer 29

increase inflation | decrease output

Question 30

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

Answer 30

stabilizes

Question 31

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

Answer 31

upward

Question 32

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

Answer 32

decrease output | nothing to inflation

Question 33

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?

Answer 33

downward

Question 34

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

Answer 34

nonactivists

Question 35

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

Answer 35

Activists

Question 36

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

Answer 36

because the wages and prices are sticky

Question 37

What are activists commonly referred to as?

Answer 37

Kenesians

Question 38

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

Answer 38

Activists or keynesians

Question 39

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

Answer 39

to eliminate high unemployment when it develops

Question 40

What are the 5 types of lag?

Answer 40

``` data recognition legislative implementation effectiveness ```

Question 41

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

Answer 41

data lag

Question 42

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

Answer 42

recognition lag

Question 43

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

Answer 43

legislative lag

Question 44

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

Answer 44

implementation lag

Question 45

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

Answer 45

effectiveness lag

Question 46

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

Answer 46

data lag

Question 47

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?

Answer 47

recognition lag

Question 48

What is the legislative lag important for?

Answer 48

implementation of fiscal policy

Question 49

Why is legislative lag important for implementation of fiscal policy?

Answer 49

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

Question 50

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

Answer 50

legislative | implementation

Question 51

How would you describe the effectiveness lag?

Answer 51

Long and variable

Question 52

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

Answer 52

autonomous policy adjustments

Question 53

Autonomous policy adjustments can be used for what?

Answer 53

target inflation rates

Question 54

Potential output is independent of what?

Answer 54

Monetary policy

Question 55

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

Answer 55

potential output

Question 56

What is the primary goal of most governments?

Answer 56

high employment

Question 57

The pursuit of high employment can bring about what?

Answer 57

high inflation

Question 58

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

Answer 58

cost-push inflation

Question 59

This results from policymakers pursuing policies that increase aggregate demand?

Answer 59

demand-pull inflation

Question 60

Demand-pull inflation results from what?

Answer 60

policymakers pursuing policies that increase aggregate demand

Question 61

Cost-push inflation results from what?

Answer 61

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

Question 62

The cost-push shock acts like what?

Answer 62

a temporary negative supply shock

Question 63

The cost-push shock does what to inflation rates?

Answer 63

raises them

Question 64

When output falls and unemployment increases what happens to inflation?

Answer 64

rise

Question 65

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

Answer 65

output falls | unemployment rises

Question 66

Why is some unemployment always present?

Answer 66

because of frictions in the labor market

Question 67

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

Answer 67

when unemployment is below the natural rate level

Question 68

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

Answer 68

cost-push inflation | demand-pull inflation

Question 69

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

Answer 69

cost-push inflation

Question 70

Cost-push inflation occurs when?

Answer 70

when unemployment is above the natural rate level

Question 71

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

Answer 71

Yes

Question 72

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

Answer 72

increase

Question 73

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

Answer 73

shifts it right

Question 74

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

Answer 74

rise

Question 75

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

Answer 75

up and left

Question 76

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

Answer 76

up and left

Question 77

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

Answer 77

consistent

Question 78

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

Answer 78

in the short run

Question 79

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

Answer 79

long run

Question 80

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

Answer 80

through autonomous monetary policy

Question 81

Autonomous monetary policy adjusts what?

Answer 81

the equilibrium real interest rate

Question 82

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

Answer 82

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

Question 83

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

Answer 83

both inflations