1.

All of the following central banks have announced numerical targets for
inflation EXCEPT the:
OK United States Federal Reserve System.
Bank of Canada.
Bank of England.
Central Bank of Brazil.
Reserve Bank of New Zealand
2. A reduction in the Fed's target inflation rate is equivalent to:
an adverse inflation shock.
a favorable inflation shock.
a shock to potential output.
OK an upward (leftward) shift in the Fed's monetary policy reaction
function.
a downward (rightward) shift in the Fed's monetary policy reaction
function.
3. If inflation equals zero, then a worker's real wage will fall when:
the nominal wage increases.
OK the nominal wage decreases.
the nominal wage is constant.
the nominal wage increase, decreases, or remains constant.
relative prices increase.
4. In order to determine whether a temporary bulge in inflation has
shifted inflationary expectation, the Federal Reserve can monitor:
real interest rates.
nominal interest rates.
OK the core rate of inflation.
GDP.
the unemployment rate.
5. An inflation dove is someone who
easily anchors inflation expectations.
OK is not strongly committed to maintaining low inflation.
is committed to maintaining low inflation even at the cost of reduced
output and employment.
believes monetary policy is more powerful than fiscal policy.
encourages preemptive policy strikes.
6.

Based on the figure, assume that the economy starts initially at a long-run
equilibrium
at point A in the aggregate demand-aggregate supply diagram and at point F
on monetary policy reaction function (MPRF1). If the Federal Reserve lowers its
long-run inflation target from 8 percent to 3 percent, then when the long-run
equilibrium is restored, output will be _____ and the real interest rate will
be _____.
YES Y*; 5 percent
Y1; 7 percent
NO Y1; 5 percent
Y1; 2 percent
Y2; 5 percent
Feedback

For more information, see p. 457 of your textbook.

7. Starting from full employment at the initial target inflation rate, if there
is an adverse inflation shock, then the Federal Reserve must _____ in order to
keep inflation from becoming permanently higher.
increase the target inflation rate.
decrease the target inflation rate.
OK maintain the initial target inflation rate.
 shift the short-run aggregate supply curve up.
shift the short-run aggregate supply curve down.
8. The inside lag is relatively shorter for _____ policy and the outside lag is

relatively shorter for _____ policy.

OK monetary; fiscal
monetary; monetary
monetary; structural
fiscal; fiscal
fiscal; monetary
9. Anchored inflationary expectations are people's expectations of future
inflation that:
increase if inflation rises temporarily.
decrease if inflation rises temporarily.
OK do not change if inflation rises temporarily.
are based on the level of potential output.
are based on the unemployment rate.
10. If the central bank moves to reduce the inflation rate in an economy that is

initially at long-run equilibrium, then in the short-run the inflation rate _____
and in the long-run the inflation rate ____.
increases; increases
NO decreases; declines
shows little change; increases
YES shows little change; declines
increases; decreases
Feedback

For more information, see p. 457 of your textbook.

1. Suppose the monetary policy reaction function has the following form: r= .03
+ 1.0 (p- .08), where r equals the real interest rate and p equals the inflation
rate. If the central bank wishes to follow of a policy of disinflation and reduce
the target inflation rate to 2 percent (.02), then the new monetary policy
reaction function should be of the following form:
r= .03 + 1.0 (p - .08).
r=.02 + 1.0 (p - .08).
NO r= .03 + .02 (p - .08).
YES r= .03 + 1.0 (p - .02).
r= (.03+.02) + 1.0 (p - .08).
Feedback

For more information, see p. 457 of your textbook.

2. All of the following central banks have announced numerical targets for
inflation EXCEPT the:
OK United States Federal Reserve System.
Bank of Canada.
Bank of England.
Central Bank of Brazil.
Reserve Bank of New Zealand
3. If inflation equals zero, then a worker's real wage will fall when:
the nominal wage increases.
OK the nominal wage decreases.
the nominal wage is constant.
the nominal wage increase, decreases, or remains constant.
relative prices increase.
4. A downward (rightward) shift in the Fed's monetary policy reaction function
is equivalent to:
 an adverse inflation shock.
a favorable inflation shock.
a shock to potential output.
a reduction in the Fed's target inflation rate.
OK an increase in the Fed's target inflation rate.
5. An argument against a central bank policy of announcing numerical inflation
targets is that inflation targeting policies:
enhance central bank credibility.
anchor inflationary expectations.
OK emphasize inflation at the expense of output stabilization.
increase uncertainty.
increase central bank flexibility in response to shocks.
6.

Based on the figure assume the economy is initially at a long-run equilibrium at

point A in the aggregate demand-aggregate supply diagram and at point E on the
monetary policy reaction function (MPRF1) with Y=Y*, r=r*, and p=p*1. A decrease
in spending shifts the aggregate demand curve from AD1 to AD2. If the Fed acts
preemptively to lower its target interest rate to prevent a decrease in inflation,
the change will be represented by a move from E to ___ and from C to ____ in the
figure.
OK F; A
F; D
H; A
H; D
E; A
7. Shocks to aggregate demand _____ require the Fed to choose between inflation
and output stability, while shocks to aggregate supply ____ require the Fed to
choose between inflation and output stability.
NO do; do
do; do not
may or may not; may or may not
YES do not; do
do not; do not
Feedback

For more information, see p. 463 of your textbook.

8. Announced numerical inflation targets are advocated for all of the following
reasons EXCEPT that inflation targets:
reduce inflation uncertainty.
anchor inflationary expectations.
enhance central bank credibility.
OK eliminate the tradeoff between maintaining output or inflation in the
event of adverse inflationary shocks.
are appropriate since central banks can control long-run inflation.
9. The situation in which central bankers are insulated from short-term
political considerations and are allowed to take a long-term view of the economy
is called:
being an inflation dove.
being an inflation hawk.
the outside lag of monetary policy.
the inside lag of monetary policy.
OK central bank independence.
10. The short-run costs of disinflation are a(n) _____ gap and _____
unemployment.
expansionary; higher
expansionary; lower
expansionary; no change in
OK recessionary; higher
recessionary; lower