Flashcard Micro

Question 1

What happens to the pound when the Bank of England cuts interest rates?

Answer 1

The pound depreciates, making exports more competitive and imports more expensive

This leads to increased inflationary pressures and a potential trade deficit.

Question 2

How long does it typically take for the full effect of a cut in the Bank of England’s interest rate to materialize?

Answer 2

18 – 24 months

Question 3

What is the primary monetary policy objective of the Federal Reserve according to the Federal Reserve Act?

Answer 3

To maintain long run growth of monetary and credit aggregates, promote maximum employment, stable prices, and moderate long-term interest rates.

Question 4

What is the primary objective of the Eurosystem as stated in the Treaty on the Functioning of the European Union?

Answer 4

To maintain price stability.

Question 5

What is the quantitative definition of price stability according to the ECB?

Answer 5

A year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.

Question 6

What is the Bank of England’s inflation target?

Answer 6

2% annual rate of inflation based on the Consumer Prices Index (CPI).

Question 7

What must the Governor of the Bank of England do if the inflation target is missed by more than 1 percentage point?

Answer 7

Write an open letter to the Chancellor explaining the reasons for the deviation and proposals to return to the target.

Question 8

What significant change did Gordon Brown implement regarding the Bank of England in 1997?

Answer 8

He granted the Bank of England independence from political control.

Question 9

What is the composition of the monetary policy committee established after the Bank of England’s independence?

Answer 9

The committee consists of the Governor, his deputy, a second deputy, two bank executive directors, and four external experts.

Question 10

What economic trade-off might politicians face if they controlled monetary policy in the run-up to an election?

Answer 10

The temptation to lower interest rates to boost the economy and win votes versus the risk of increasing inflation.

Question 11

What measures does the Bank of England have to ensure transparency in monetary policy decisions?

Answer 11

Regular meetings and public announcements regarding monetary policy decisions.

Question 12

Why do most central banks target a 2% inflation rate instead of 0%?

Answer 12

To provide a buffer against deflation and allow for economic growth.

Question 13

What are some potential risks of raising the inflation target above 2%?

Answer 13

Damaging the credibility of central banks and the possibility of a wage-price spiral.

Question 14

What was the average inflation rate in the UK over the past five years as mentioned in the article?

Answer 14

3.2%

Question 15

True or False: The Bank of England’s Monetary Policy Committee believes that all inflation is caused by factors beyond their control.

Answer 15

False

Question 16

Fill in the blank: The Bank of England’s remit recognizes the role of price stability in achieving _______.

Answer 16

economic stability

Question 17

According to the ECB, what does ‘symmetry’ in inflation targeting imply?

Answer 17

Both inflation above 2% and deflation are inconsistent with price stability.

Question 18

What is a potential consequence of fiscal activism on monetary policy?

Answer 18

Increased pressure on central banks to raise inflation targets.

Question 19

What challenges did the Bank of Japan face after raising its inflation target from 1% to 2%?

Answer 19

Persistent inflation undershoots despite aggressive quantitative easing.

Question 20

What is the Bank of England’s (BOE) inflation target?

Answer 20

2%

The BOE aims to keep annual inflation at 2% as part of its monetary policy.

Question 21

What has been the average headline inflation in the UK over the past five years?

Answer 21

3.2%

This average exceeds the BOE’s remit to keep inflation at 2%.

Question 22

What is the average consumer-price inflation excluding indirect taxes in the UK over the past five years?

Answer 22

2.8%

This figure indicates that when tax effects are stripped out, inflation is lower but still close to the target.

Question 23

What was the average services inflation in the UK over the past five years?

Answer 23

3.7%

Services inflation is more domestically focused and has been affected by value-added tax increases.

Question 24

What was the average goods-price inflation in the UK between 2000 and 2005?

Answer 24

−0.6%

This period was characterized by disinflationary pressures from imports.

Question 25

What has been the average goods-price inflation in the UK since 2006?

Answer 25

2.5% ## Footnote This indicates a significant rise in inflation compared to the previous five years.

Question 26

Why is the BOE's projection of falling inflation significant?

Answer 26

It may be mitigated by rising oil prices ## Footnote The BOE's projections are based on assumptions that may no longer hold true due to recent commodity price increases.

Question 27

True or False: The BOE has consistently underestimated inflation over the past six years.

Answer 27

True ## Footnote The BOE's consistent misjudgment could harm its reputation as a central bank.

Question 28

What historic step did the Federal Reserve take on January 25, 2012?

Answer 28

Set an inflation target of 2% ## Footnote This was a significant move to align the Fed with other major central banks.

Question 29

What is the dual mandate of the Federal Reserve?

Answer 29

Price stability and maximum sustainable employment ## Footnote The Fed aims to balance both goals in its monetary policy.

Question 30

What does the Federal Reserve define as 'price stability'?

Answer 30

Inflation at 2% ## Footnote This definition aligns with the Fed's statutory goals.

Question 31

What concern did some politicians have regarding the Fed's explicit inflation target?

Answer 31

It might prioritize inflation over full employment ## Footnote Skeptics worried that setting an explicit inflation target could diminish the focus on employment.

Question 32

What is 'average inflation targeting'?

Answer 32

A strategy that aims to achieve an average inflation rate over time ## Footnote It contrasts with the current framework that does not compensate for past inflation deviations.

Question 33

What is the downside of average inflation targeting?

Answer 33

Difficulty in convincing the public it can maintain above-target inflation ## Footnote There are concerns that the Fed may struggle to support sustained above-target inflation without triggering inflationary expectations.

Question 34

What is the significance of inflation expectations for central banks?

Answer 34

Well-anchored inflation expectations help stabilize the economy ## Footnote When expectations are stable, it allows better economic management through monetary policy.

Question 35

What did the Fed's review of its monetary policy strategy aim to consider?

Answer 35

The adequacy of existing tools and communication practices ## Footnote The review will not consider changing the statutory mandate or the 2% inflation objective.

Question 36

What is the neutral interest rate?

Answer 36

The short-term real interest rate consistent with full employment and stable inflation ## Footnote A lower neutral rate limits the Fed's ability to cut interest rates during recessions.

Question 37

What is average inflation targeting?

Answer 37

A monetary policy framework where the central bank aims for an average inflation rate over time rather than a specific target. ## Footnote This approach allows for periods of above-target inflation to be compensated by below-target inflation later.

Question 38

Who proposed the Taylor Rule?

Answer 38

John B. Taylor ## Footnote The Taylor Rule is a monetary policy targeting rule aimed at stabilizing economic activity.

Question 39

What does the Taylor Rule consider for setting interest rates?

Answer 39

The federal funds rate, price level, and changes in real income. ## Footnote It computes the optimal federal funds rate based on the gap between targeted and actual inflation rates and the output gap.

Question 40

What is the primary goal of the Federal Open Market Committee (FOMC)?

Answer 40

To achieve an average inflation rate of 2%. ## Footnote The FOMC aims for an equal likelihood of higher or lower inflation around this target.

Question 41

What is monetarism?

Answer 41

A school of thought that emphasizes the supply of money as a key variable in determining price levels and nominal GDP. ## Footnote It is based on the Quantity Theory of Money.

Question 42

What is the Equation of Exchange?

Answer 42

MV = PY ## Footnote Where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP.

Question 43

What happens to nominal GDP if the money supply increases according to the Quantity Theory?

Answer 43

Nominal GDP increases. ## Footnote This assumes that velocity remains constant and that the economy is returning to full employment.

Question 44

What is the primary criticism of the Taylor Rule?

Answer 44

It considers a limited number of factors in its calculations. ## Footnote Critics argue that it oversimplifies the complexities of the economy.

Question 45

What is quantitative easing (QE)?

Answer 45

An unconventional monetary policy where a central bank purchases financial assets to inject money into the economy. ## Footnote QE is intended to support growth and keep inflation on target.

Question 46

What is deflation?

Answer 46

A general decline in prices, leading to an increase in the real value of money. ## Footnote Deflation can cause consumers to delay purchases, worsening economic downturns.

Question 47

Why do economists fear deflation?

Answer 47

It can lead to a deflation trap where low prices reduce demand and economic activity. ## Footnote This scenario can also increase the real burden of debt.

Question 48

What is the Consumer Price Index (CPI)?

Answer 48

A measure that examines the weighted average of prices of a basket of consumer goods and services. ## Footnote The CPI is used to assess price changes associated with the cost of living.

Question 49

What is the difference between CPI and PCE price index?

Answer 49

CPI measures what consumers are buying, while PCE measures what businesses are selling. ## Footnote PCE accounts for substitution between goods when prices change.

Question 50

What is core inflation?

Answer 50

Inflation that excludes volatile categories like food and energy. ## Footnote This measure helps to provide a clearer picture of underlying inflation trends.

Question 51

What was the CPI increase for April 2021?

Answer 51

CPI was up 0.8 percent for the month. ## Footnote Year-over-year, the index increased by 4.2 percent.

Question 52

What is Goodhart’s Law?

Answer 52

Whenever a measure becomes a target, it ceases to be a good measure. ## Footnote This concept highlights the challenges of using monetary supply as a target.

Question 53

What is the main concern regarding inflation post-Covid-19?

Answer 53

The potential for prices to overheat due to government stimulus and economic recovery. ## Footnote Some economists argue that a little inflation may be beneficial after a period of low inflation.

Question 54

What was the increase in Core CPI in March?

Answer 54

0.9 percent ## Footnote Core CPI excludes volatile items like food and energy.

Question 55

What was the year-over-year inflation rate when removing food, gas, and used cars?

Answer 55

2.6 percent

Question 56

By how much have energy prices increased over the past year?

Answer 56

25 percent

Question 57

What is the Federal Reserve's inflation target?

Answer 57

2 percent

Question 58

What is considered a healthy level of inflation?

Answer 58

A small amount of inflation

Question 59

What happens when businesses expect inflation?

Answer 59

They might increase prices

Question 60

Fill in the blank: Inflation is one of many measures to gauge what’s going on in the economy, along with _______ and _______.

Answer 60

[unemployment], [wages]

Question 61

True or False: The Fed prefers inflation to be too low rather than too high.

Answer 61

True

Question 62

What economic phenomenon does the Phillips curve describe?

Answer 62

The inverse relationship between unemployment and inflation

Question 63

What was a major catalyst for recent inflation concerns?

Answer 63

The amount of stimulus undertaken in response to the pandemic

Question 64

What is the current federal funds rate near?

Answer 64

Zero

Question 65

What might rising inflation lead the Fed to do with interest rates?

Answer 65

Increase them

Question 66

What is a potential benefit of modest inflation for borrowers?

Answer 66

It makes repaying debts easier

Question 67

Fill in the blank: Increased inflation is usually accompanied by higher _______.

Answer 67

[interest rates]

Question 68

What is one worst-case inflation scenario mentioned?

Answer 68

Hyperinflation in Argentina

Question 69

What decade is often referenced for high inflation in the US?

Answer 69

1970s

Question 70

What term describes the combination of high inflation and stagnation?

Answer 70

Stagflation

Question 71

What was the average inflation rate in the US during the 1970s?

Answer 71

Above 6 percent

Question 72

What did President Nixon end that contributed to inflation in the 1970s?

Answer 72

Dollar convertibility to gold

Question 73

What is a concern regarding the US economy's response to the pandemic?

Answer 73

Potential for high inflation and stagflation

Question 74

Who is a prominent economist warning about potential inflation due to government spending?

Answer 74

Larry Summers

Question 75

What is the main cause of the current inflation?

Answer 75

The federal government’s response to the pandemic, particularly President Biden’s $1.9 trillion Covid-19 relief bill. ## Footnote This relief bill significantly increased government spending, impacting inflation rates.

Question 76

Who is Larry Summers?

Answer 76

An economist who served in both Bill Clinton’s and Barack Obama’s administrations and warns about potential high inflation. ## Footnote He has been vocal about fiscal macroeconomic policies and their impacts.

Question 77

What is Larry Summers' prediction regarding inflation?

Answer 77

He believes there’s a one-third chance of inflation and stagflation occurring in the future. ## Footnote He also suggests a similar chance of no inflation if the Fed takes action.

Question 78

What does Paul Krugman believe about the Federal Reserve's ability to manage inflation?

Answer 78

He believes the Fed has 'easy' tools to address inflation and does not foresee a repeat of the irresponsible monetary policy of the 1970s. ## Footnote Krugman is a Nobel laureate economist.

Question 79

True or False: The worst-case inflation scenario is considered the most likely outcome.

Answer 79

False. ## Footnote Experts believe there is reason to stay vigilant but not to panic.

Question 80

What does Doug Holtz-Eakin assert about extreme inflation increases?

Answer 80

He states that while extreme increases in inflation are undesirable, he does not believe they are likely to happen. ## Footnote He emphasizes the importance of timely adjustments.

Question 81

How does Chair Powell view the future of inflation?

Answer 81

He expects a short 'pop' in inflation but wants to avoid overreacting. ## Footnote Powell believes that longer-term inflation expectations should remain stable.

Question 82

What can policymakers do if inflation rises too quickly?

Answer 82

They can increase interest rates to try to slow down inflation. ## Footnote Higher interest rates can lead to increased costs for loans but higher returns on savings.

Question 83

Fill in the blank: The greater risk according to Yellen is __________.

Answer 83

scarring the people due to the pandemic. ## Footnote Yellen emphasizes the long-term impacts of the pandemic on lives and livelihoods.

Question 84

What are the risks associated with the timing of Fed's response to inflation?

Answer 84

The Fed may react too soon and cut off growth or wait too long and allow inflation to get out of control. ## Footnote Timing is crucial in managing economic growth and inflation.

Question 85

What lesson does Schoenle suggest we will learn from the current economic situation?

Answer 85

How the economy adjusts after a major disturbance like the pandemic. ## Footnote This situation is unique and will provide insights into economic recovery.