final exam Flashcards by Paige Rawitscher

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.

D) low and stable inflation.

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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

D) difficulty interpreting relative price movements

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3) Economists believe that countries recently suffering hyperinflation have experienced
A) reduced growth.
B) increased growth.
C) reduced prices.
D) lower interest rates

A) reduced growth.

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4) 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 nominal
B) a real
C) an operating
D) an intermediate

A) a nominal

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5) 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

A) anchor.

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6) A nominal anchor promotes price stability by
A) outlawing inflation.
B) stabilizing interest rates.
C) keeping inflation expectations low.
D) keeping economic growth low.

C) keeping inflation expectations low.

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7) 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 theshort 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

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

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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

A) inflation rate

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9) The theory that monetary policy conducted on a discretionary, day-by-day basis leads to poor
long-run outcomes is referred to as the
A) adverse selection problem.
B) moral hazard problem.
C) time-inconsistency problem.
D) nominal-anchor problem.

C) time-inconsistency problem.

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10) The ________ problem of discretionary policy arises because economic behavior is
influenced by what firms and people expect the monetary authorities to do in the future.
A) moral hazard
B) time-inconsistency
C) nominal-anchor
D) rational-expectation

B) time-inconsistency

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11) If the central bank pursues a monetary policy that is more expansionary than what firms and
people expect, then the central bank must be trying to
A) boost output in the short run.
B) constrain output in the short run.
C) constrain prices.
D) boost prices in the short run.

A) boost output in the short run.

when the central bank persures a monetary policy that is more expansionary than expected, it typically aims to stimulate economic activity, an unexpected expansionary policy can lower interest rates and increase the money supply which encourages borrowing and spending which can boost output and employment in the short run which can also lead to higher prices (inflation overtime) if economy is near or at full capacity)

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12) The time-inconsistency problem in monetary policy can occur when the central bank
conducts policy
A) using a nominal anchor.
B) using a strict and inflexible rule.
C) on a discretionary, day-by-day basis.
D) using a flexible, discretionary rule.

C) on a discretionary, day-by-day basis.

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High unemployment is undesirable because it
A) results in a loss of output.
B) always increases inflation.
C) always increases interest rates.
D) reduces idle resources.

A) results in a loss of output.

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8) Having interest rate stability
A) allows for less uncertainty about future planning.
B) leads to demands to curtail the Fed’s power.
C) guarantees full employment.
D) leads to problems in financial markets.

A) allows for less uncertainty about future planning.

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9) Foreign exchange rate stability is important because a decline in the value of the domestic
currency will ________ the inflation rate, and an increase in the value of the domestic currency
makes domestic industries ________ competitive with competing foreign industries.
A) increase; more
B) increase; less
C) decrease; more
D) decrease; less

B) increase; less

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1) Which set of goals can, at times, conflict in the short run?
A) high employment and economic growth
B) interest rate stability and financial market stability
C) high employment and price level stability
D) exchange rate stability and financial market stability

C) high employment and price level stability

In the short run, pursuing high employment through expansionary monetary policy can lead to increased demand and potentially push the economy beyond its capacity, resulting in upward pressure on prices (inflation). Conversely, focusing on price level stability might require more restrictive policies that can reduce demand and increase unemployment. Thus, these two goals might conflict in the short run.

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3) The mandate for the monetary policy goals that has been given to the European Central Bank
is an example of a ________ mandate.
A) primary
B) dual
C) secondary
D) hierarchical

D) hierarchical

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4) The mandate for the monetary policy goals that has been given to the Federal Reserve System
is an example of a ________ mandate.
A) primary
B) dual
C) secondary
D) hierarchical

B) dual

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5) Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in
the ________.
A) price stability; short run
B) price stability; long run
C) reducing business-cycle fluctuations; short run
D) reducing business-cycle fluctuations; long ru

B) price stability; long run

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) Which of the following is NOT an element of inflation targeting?
A) a public announcement of medium-term numerical targets for inflation
B) an institutional commitment to price stability as the primary long-run goal
C) an information-inclusive approach in which only monetary aggregates are used in making
decisions about monetary policy
D) increased accountability of the central bank for attaining its inflation objectives

C) an information-inclusive approach in which only monetary aggregates are used in making
decisions about monetary policy

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6) Which of the following is NOT a disadvantage to inflation targeting?
A) There is a delayed signal about achievement of the target.
B) Inflation targets could impose a rigid rule on policymakers.
C) There is potential for larger output fluctuations.
D) There is a lack of transparency.

D) There is a lack of transparency.

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7) The decision by inflation targeters to choose inflation targets ________ zero reflects the
concern of monetary policymakers that particularly ________ inflation can have substantial
negative effects on real economic activity.
A) below; high
B) below; low
C) above; high
D) above; low

d) above; low
USA is 2%

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1) The type of monetary policy regime that the Federal Reserve has followed From the 1980s up until the time Ben Bernanke became chair of the Federal Reserve in 2006 can best be described as

C) policy with an implicit nominal anchor.

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3) Which of the following is NOT a disadvantage of the Fed’s “just do it” approach to monetary policy?

D) It relies on a stable money-inflation relationship.

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1) Lessons that economists and policy makers have learned from the recent global financial crisis include A) developments in the financial sector have a far greater impact on economic activity than was earlier realized. B) the effective lower bound on interest rates can be a serious problem. C) the cost of cleaning up after a financial crisis is very high. D) price and output stability do not ensure financial stability. E) All of the above

E) All of the above

The problems of raising the level of the inflation target include A) if the effective-lower-bound problem is rare, then the benefits of a higher inflation target are not very large. B) the costs of higher inflation in terms of the distortions it produces in the economy are high. C) it is more difficult to stabilize the inflation rate at a higher targeting level. D) all of the above.

D) all of the above.

1) The "Greenspan doctrine"—central banks should not try to prick bubbles—was based on which of the following arguments? A) Asset-price bubbles are nearly impossible to identify. B) Monetary actions would be likely to affect asset prices in general, rather than the specific assets that are experiencing a bubble. C) Raising interest rates has often been found to cause a bubble to burst more severely. D) Monetary policy actions to prick bubbles can have harmful effects on the aggregate economy. E) All of the above

E) All of the above

2) When asset prices increase above their fundamental values it is called an A) asset-price bubble. B) irrational bubble. C) asset-price spike. D) irrational spike

A) asset-price bubble.

4) A credit-driven bubble arises when ________ in lending causes ________ in asset prices which can cause ________ in lending. A) a decrease; a decrease; an increase B) a decrease; an increase; an increase C) an increase; an increase; a further increase D) a decrease; a decrease; a further decrease

C) an increase; an increase; a further increase

5) ________ bubble is driven entirely by unrealistic optimistic expectations. A) An irrational exuberance B) A credit-driven C) A stock D) A debt-driven

A) An irrational exuberance

8) Which of the following is NOT an argument against using monetary policy to prick asset- price bubbles? A) The effect of increasing interest rates on asset prices is uncertain. B) A bubble may only exist in some asset-prices and monetary policy will affect all asset prices. C) Using monetary policy to prick an asset-price bubble may have adverse effect on the aggregate economy. D) Even though credit-drive bubbles are easier to identify, they are still relatively hard to identify.

D) Even though credit-drive bubbles are easier to identify, they are still relatively hard to identify

) Which of the following is NOT an operating instrument? A) nonborrowed reserves B) monetary base C) federal funds interest rate D) discount rate

B) monetary base

Which of the following is a potential operating instrument for the central bank? A) the monetary base B) the M1 money supply C) nominal GDP D) the discount rate

D) the discount rate

4) If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because A) of fluctuations in the demand for reserves. B) of fluctuations in the consumption function. C) bond values will tend to remain stable. D) of fluctuations in the business cycle.

A) of fluctuations in the demand for reserves.

5) If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent A) fluctuations of nonborrowed reserves will be small. B) fluctuations of nonborrowed reserves will be large. C) the Fed will probably quickly abandon this policy, as it did in the 1960s. D) the Fed will probably quickly abandon this policy, as it did in the 1950s

B) fluctuations of nonborrowed reserves will be large.

6) Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets A) a monetary aggregate. B) the monetary base. C) an interest rate. D) nominal GDP

A) a monetary aggregate.

10) When it comes to choosing an policy instrument, both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay. A) three-month T-bill; monetary B) three-month T-bill; reserve C) federal funds; monetary D) federal funds; reserve

D) federal funds; reserve

1) The exchange rate is A) the price of one currency relative to gold. B) the value of a currency relative to inflation. C) the change in the value of money over time. D) the price of one currency relative to another.

D) the price of one currency relative to another

2) Exchange rates are determined in A) the money market. B) the foreign exchange market. C) the stock market. D) the capital market.

B) the foreign exchange market.

3) Although foreign exchange market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of A) bank deposits denominated in different currencies. B) SDRs. C) gold. D) ECUs

A) bank deposits denominated in different currencies.

4) The immediate (two-day) exchange of one currency for another is a A) forward transaction. B) spot transaction. C) money transaction. D) exchange transaction

B) spot transaction.

5) An agreement to exchange dollar bank deposits for euro bank deposits in one month is a A) spot transaction. B) future transaction. C) forward transaction. D) deposit transaction

C) forward transaction.

6) If 1 euro can be purchased for $1.10 today on the market, this exchange rate is called the A) spot exchange rate. B) forward exchange rate. C) fixed exchange rate. D) financial exchange rate

A) spot exchange rate.

7) In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the A) spot exchange rate. B) money exchange rate. C) forward exchange rate

C) forward exchange rate

When the value of the British pound changes from $1.25 to $1.50, the pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

C) appreciated; depreciated

9) When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated

B) depreciated; appreciated

11) When the value of the dollar changes from £0.75 to £0.5, then the British pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

C) appreciated; depreciated

21) When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive. A) appreciated; British cars sold in the United States become more B) appreciated; British cars sold in the United States become less C) depreciated; American wheat sold in Britain becomes more D) depreciated; American wheat sold in Britain becomes les

D) depreciated; American wheat sold in Britain becomes less

22) If the dollar depreciates relative to the Swiss franc A) Swiss chocolate will become cheaper in the United States. B) American computers will become more expensive in Switzerland. C) Swiss chocolate will become more expensive in the United States. D) Swiss computers will become cheaper in the United States

C) Swiss chocolate will become more expensive in the United States.

23) Everything else held constant, when a country's currency appreciates, the country's goods abroad become ________ expensive and foreign goods in that country become ________ expensive. A) more; less B) more; more C) less; less D) less; more

A) more; less

24) Everything else held constant, when a country's currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive. A) more; less B) more; more C) less; less D) less; more

D) less; more

1) According to the Purchasing Power Parity, if one country's price level rises relative to another's by a certain percentage, then the other country's currency A) maintains its value. B) depreciates by the same percentage. C) appreciates by the same percentage. D) lose its value.

C) appreciates by the same percentage. According to Purchasing Power Parity (PPP), if one country's price level rises relative to another's, the currency of the country with the higher inflation will depreciate, and the currency of the country with the lower inflation will appreciate. This is to maintain equal purchasing power between the two currencies. So if Country A's price level rises, Country B's currency must appreciate by the same percentage to restore balance.

4) The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A) theory of purchasing power parity B) law of one price C) theory of money neutrality D) quantity theory of money

A) theory of purchasing power parity

5) The theory of PPP suggests that if one country's price level rises relative to another's, its currency should A) depreciate. B) appreciate. C) float. D) do none of the above

A) depreciate.

6) The theory of PPP suggests that if one country's price level falls relative to another's, its currency should A) depreciate. B) appreciate. C) float. D) do none of the above

B) appreciate.

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should A) depreciate in the long run. B) appreciate in the long run. C) appreciate in the short run. D) depreciate in the short run.

B) appreciate in the long run.

The theory of purchasing power parity cannot fully explain exchange rate movements in the short run because A) all goods are identical even if produced in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries.

C) some goods are not traded between countries.

9) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in A) the trade balances of the two countries. B) the current account balances of the two countries. C) fiscal policies of the two countries. D) the price levels of the two countries

A) the trade balances of the two countries.

11) According to PPP, when the Big Mac has a high price in terms of local currency, then the exchange rate quoted in U.S. dollars per unit of local currency should be ________. A) low B) high C) uncertain D) one

B) high

12) When a country's goods and services are expensive relative to other countries', we say that its currency is ________ in terms of purchasing power parity. A) overvalued B) undervalued C) rational D) irrational

A) overvalued

14) The theory of PPP suggests that if one country's price level rises relative to another's, its currency should A) depreciate in the long run. B) appreciate in the long run. C) depreciate in the short run. D) appreciate in the short ru

A) depreciate in the long run. Purchasing Power Parity (PPP) theory suggests that exchange rates adjust in the long run to equalize the price levels between two countries. If one country’s price level rises (inflation) relative to another's, its goods become more expensive compared to foreign goods. As a result: Demand for its goods (and currency) falls, Its currency depreciates in the long run to restore parity in purchasing power. ✅ So: A) depreciate in the long run is correct.

8) According to the purchasing power parity theory, a rise in the United States price level of 5 percent, and a rise in the Mexican price level of 6 percent cause A) the dollar to appreciate 1 percent relative to the peso. B) the dollar to depreciate 1 percent relative to the peso. C) the dollar to depreciate 5 percent relative to the peso. D) the dollar to appreciate 5 percent relative to the peso

A) the dollar to appreciate 1 percent relative to the peso.

19) Higher tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long

19) D) appreciate; long

20) Lower tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long

B) appreciate; long

22) Everything else held constant, increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate. A) imports; imports B) imports; exports C) exports; imports D) exports; exports

C) exports; imports

23) Everything else held constant, increased demand for a country's exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate

B) appreciate; depreciate

31) Which of the followings cause a depreciation of domestic currency in the long run? I. An increase in domestic price level. II. An increase in tariff. III. An increase in imports demand. IV. An increase in export demand. V. An increase in productivity. A) All five. B) I, II, and III. C) I and III. D) IV and V.

C) I and III.

1) The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is A) the level of trade and capital flows. B) the expected return on these assets relative to one another. C) the liquidity of these assets relative to one another. D) the riskiness of these assets relative to one another

B) the expected return on these assets relative to one another.

) The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets. A) theory of portfolio choice B) law of one price C) interest parity condition D) theory of foreign capital mobility

A) theory of portfolio choice

3) The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another. A) interest rate B) risk C) expected return D) liquidity

C) expected return

4) As the relative expected return on dollar assets increases, foreigners will want to hold more ________ assets and less ________ assets, everything else held constant. A) foreign; foreign B) foreign; dollar C) dollar; foreign D) dollar; dollar

C) dollar; foreign

5) When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets. A) dollar; dollar B) dollar; foreign C) foreign; dollar D) foreign; foreign

B) dollar; foreign

6) When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a ________ demand for dollar assets, everything else held constant. A) dollar; foreign; constant B) dollar; foreign; higher C) foreign; dollar; higher D) foreign; dollar; constan

B) dollar; foreign; higher

8) Everything else held constant, when the current value of the domestic currency increases, the ________ domestic assets ________. A) demand for; increases B) quantity demanded of; increases C) demand for; decreases D) quantity demanded of; decreases

D) quantity demanded of; decreases

9) Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________. A) quantity supplied; does not change B) supply; decreases C) quantity supplied; increases D) supply; increases

C) quantity supplied; increases

1) An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate

A) increase; appreciate

2) An increase in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate

A) right; appreciate

3) A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate

D) decrease; depreciate

5) ________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate

A) An increase; appreciate

) ________ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate

A) An increase; appreciate

) ________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate

D) A decrease; depreciate

10) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right

A) An increase; right

13) Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________. A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate

D) decrease; depreciate

16) An increase in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate

D) left; depreciate

17) A decrease in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate

B) increase; depreciate

final exam Flashcards

(85 cards)