quiz 16 Flashcards
(25 cards)
Q: What is a nominal anchor?
A: A nominal variable (like the inflation rate or money supply) that ties down the price level to achieve price stability.
Q: How does a nominal anchor promote price stability?
A: By keeping inflation expectations low.
Q: Why is monetary policy considered time-inconsistent?
A: Because policymakers are tempted to pursue more expansionary policy in the short run.
Q: Why was the Federal Reserve System created?
A: To promote financial market stability.
Q: What is a benefit of interest rate stability?
A: It allows for less uncertainty about future planning.
Q: Which two goals can conflict in the short run?
A: High employment and price level stability.
Q: What type of mandate does the European Central Bank have?
A: A hierarchical mandate.
What type of mandate does the Federal Reserve System have?
A dual mandate.
What is the key goal in both dual and hierarchical mandates?
Price stability in the long run.
What is NOT an advantage of inflation targeting?
There is an immediate signal on the achievement of the target.
What is NOT a disadvantage of inflation targeting?
There is a lack of transparency.
If inflation is expected to rise in 2 years, when should policymakers tighten monetary policy?
now
What did the FOMC adopt on January 25, 2012?
inflation target
What lesson did policymakers learn from the global financial crisis?
All of the above (financial sector impact, zero lower bound issue, high cleanup costs, and price/output stability don’t ensure financial stability).
What is it called when asset prices rise above their fundamental values?
An asset-price bubble.
What type of bubble is caused by a spike in lending from low interest rates?
A credit-driven bubble.
How does a credit-driven bubble develop?
An increase in lending → increase in asset prices → further increase in lending.
Which of the following is NOT an operating instrument?
Discount rate.
What is a potential operating instrument for the central bank?
The monetary base.
Why does targeting a monetary aggregate make it hard to control the interest rate?
Because of fluctuations in the demand for reserves.
Why do fluctuations in the demand for reserves cause the Fed to lose control of a monetary aggregate?
If the Fed targets an interest rate.
hat criterion does NOT need to be satisfied for choosing a policy instrument?
The variable must be transportable.
According to the Taylor rule, when should the Fed raise the federal funds rate?
When inflation rises above the target or when real GDP rises above the output target.
Using Taylor’s rule, with a 3% equilibrium real federal funds rate, 2% positive output gap, 1% target inflation, and 2% actual inflation, what should the nominal federal funds rate be?
6.5%.
