Chapter 21 Monetary Policy Strategy: The International Experience 1
Chapter 21
Monetary Policy Strategy: The International Experience
Multiple Choice
1)Overly expansionary monetary policy
(a)leads to high inflation.
(b)decreases the efficiency of the economy.
(c)hampers economic growth.
(d)does all of the above.
(e)does only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
2)Overly expansionary monetary policy
(a)leads to high inflation.
(b)can produce serious recessions.
(c)leads to deflation.
(d)does all of the above.
(e)does only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
3)Overly expansionary monetary policy
(a)decreases the efficiency of the economy.
(b)hampers economic growth.
(c)leads to deflation.
(d)all of the above.
(e)does only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
4)Overly expansionary monetary policy
(a)leads to deflation.
(b)decreases the efficiency of the economy.
(c)can produce serious recessions.
(d)does all of the above.
(e)does only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
5)Monetary policy that is too tight can
(a)produce serious recessions in which output falls and unemployment rises.
(b)lead to deflation, which, in turn, can help trigger financial crises.
(c)lead to inflation, which decreases the efficiency of the economy.
(d)do all of the above.
(e)do only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
6)Monetary policy that is too tight can
(a)produce serious recessions in which output falls and unemployment rises.
(b)lead to inflation, which, in turn, can help trigger financial crises.
(c)lead to inflation, which decreases the efficiency of the economy.
(d)do all of the above.
(e)do only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
7)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.
Answer:
Question Status: Previous Edition
8)A central feature of monetary policy strategies in all countries is the use of a nominal anchor, which is a nominal variable that monetary policymakers use as
(a)an operating target, such as the federal funds interest rate.
(b)an intermediate target, such as the federal funds interest rate.
(c)an intermediate target to achieve an ultimate goal such as price stability.
(d)an operating target to achieve an ultimate goal such as exchange rate stability.
Answer:
Question Status: Previous Edition
9)A nominal anchor
(a)is a necessary element in successful monetary policy strategies.
(b)is a nominal variable that monetary policymakers use as intermediate target to achieve an ultimate goal such as price stability.
(c)forces a nation’s monetary authority to keep the price level from growing or falling too fast.
(d)is all of the above.
(e)is only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
10)A nominal anchor
(a)can help promote price stability.
(b)is a necessary element in successful monetary policy strategies.
(c)forces a nation’s monetary authority to keep the price level from growing or falling too fast.
(d)can do all of the above.
(e)can do only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
11)Economic variables that can serve as a nominal anchor for monetary policy include
(a)the exchange rate.
(b)the inflation rate.
(c)the federal budget deficit.
(d)all of the above.
(e)both (a) and (b) of the above.
Answer:
Question Status: New
12)Economic variables that can serve as a nominal anchor for monetary policy include
(a)the exchange rate.
(b)the inflation rate.
(c)the money supply.
(d)all of the above.
(e)both (a) and (b) of the above.
Answer:
Question Status: New
13)Economic variables that can serve as a nominal anchor for monetary policy include
(a)the unemployment rate.
(b)the inflation rate.
(c)the federal budget deficit.
(d)all of the above.
(e)both (a) and (b) of the above.
Answer:
Question Status: New
14)A nominal anchor promotes price stability by
(a)outlawing inflation.
(b)stabilizing interest rates.
(c)keeping inflation expectations low.
(d)keeping economic growth low.
(e)all of the above.
Answer:
Question Status: New
15)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-consistency problem.
(d)nominal-anchor problem.
Answer:
Question Status: Revised
16)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-consistency
(c)nominal-anchor
(d)rational-expectation
Answer:
Question Status: Revised
17)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.
Answer:
Question Status: Previous Edition
18)The time-consistency problem in monetary policy can occur when the central bank conducts policy
(a)using a nominal anchor.
(b)using a strict and an inflexible rule.
(c)on a discretionary, day-by-day basis.
(d)using a flexible, discretionary rule.
Answer:
Question Status: Revised
19)In the face of rising unemployment, a central bank that conducts monetary policy on a discretionary, day-by-day basis may be tempted to pursue monetary policy that is more expansionary than they had announced. If the policy leads to high inflation with no reduction in unemployment it is because
(a)workers and firms, knowing that the central bank has discretion, raised their expectations of prices, wages, and inflation.
(b)the monetary anchor proved to be an inaccurate indicator of the direction of inflation.
(c)of both of the above reasons.
(d)of neither of the above reasons; it was simply bad luck.
Answer:
Question Status: Previous Edition
20)A professor tells his students that if they do not do well on the midterm exam, he will assign a ten-page research paper. Students are likely to be skeptical because
(a)they know that the professor may renege to avoid the extra work of grading the papers.
(b)they have been covering moral hazard and adverse selection problems in financial markets.
(c)of both of the above reasons.
(d)of neither of the above reasons.
Answer:
Question Status: Previous Edition
21)The discrepancy between announcements (what policymakers say they are going to do) and actions (what they subsequently in fact do) is called
(a)moral hazard.
(b)bait-and-switch.
(c)time consistency.
(d)nominal-anchor consistency.
Answer:
Question Status: Revised
22)If the central bank conducts monetary policy on a discretionary, day-by-day basis and announces a policy of low inflation
(a)workers and firms will almost certainly believe the announcement, because they know that the central bank does not want to lose credibility.
(b)workers and firms will likely doubt the announcement, because they know that the central bank does not want to lose credibility.
(c)workers and firms will be skeptical of the announcement, because they know that the central bank may want to renege if economic conditions change.
(d)workers and firms will not believe the announcement, because they know that the central bank will not want low inflation if unemployment rises.
Answer:
Question Status: Revised
23)A central bank may pursue a discretionary policy resulting in high inflation
(a)because a low-inflation policy is not desirable.
(b)in response to political pressure.
(c)because a high-inflation policy increases output.
(d)all of the above.
(e)both (a) and (c) of the above.
Answer:
Question Status: New
24)A central bank may pursue a discretionary policy resulting in high inflation
(a)because central banks think this policy will lower unemployment.
(b)in response to political pressure.
(c)because a high-inflation policy increases output.
(d)all of the above.
(e)both (a) and (b) of the above.
Answer:
Question Status: New
25)Targeting the exchange rate can take the form of fixing the value of the domestic currency
(a)to a commodity such as gold.
(b)to that of a large, low-inflation country.
(c)to that of a country that has a higher inflation rate than the domestic country.
(d)to any of the above.
(e)to only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
26)Under an exchange-rate targeting rule for monetary policy, a crawling peg
(a)fixes the value of the domestic currency to a commodity such as gold.
(b)fixes the value of the domestic currency to that of a large, low-inflation country.
(c)allows the domestic currency to depreciate at steady rate so that inflation in the pegging country can be higher than that of the anchor country.
(d)allows the domestic currency to depreciate at steady rate so that inflation in the pegging country can be lower than that of the anchor country.
Answer:
Question Status: Previous Edition
27)Advantages of exchange-rate targeting include:
(a)The nominal anchor of an exchange-rate target directly contributes to keeping inflation under control by tying the inflation rate for internationally traded goods to that found in the anchor country.
(b)An exchange-rate target provides an automatic rule for the conduct of monetary policy that helps mitigate the time-consistency problem.
(c)An exchange-rate target has the advantage of simplicity and clarity, as it is easily understood by the public.
(d)All of the above.
(e)Only (a) and (b) of the above.
Answer:
Question Status: Revised
28)Advantages of exchange-rate targeting include:
(a)If it is credible, the exchange-rate target anchors inflation expectations to the inflation rate in the anchor country.
(b)An exchange-rate target forces a tightening of monetary policy when there is a tendency for the domestic currency to depreciate or a loosening of policy when there is a tendency for the domestic currency to appreciate, so that discretionary, time-consistent policy is less of an option.
(c)An exchange-rate target has the advantage of leaving the country less open to a speculative attack on its currency.
(d)All of the above.
(e)Only (a) and (b) of the above.
Answer:
Question Status: Revised
29)Advantages of exchange-rate targeting include:
(a)An exchange-rate target provides an automatic rule for the conduct of monetary policy that helps mitigate the time-consistency problem.
(b)An exchange-rate target has the advantage of simplicity and clarity, as it is easily understood by the public.
(c)An exchange-rate target has the advantage of leaving the country less open to a speculative attack on its currency.
(d)All of the above.
(e)Only (a) and (b) of the above.
Answer:
Question Status: Revised
30)Both France and the United Kingdom successfully used exchange-rate targeting to lower inflation in the late 1980s and early 1990s by tying the value of their currencies to the
(a)U.S. dollar.
(b)German mark.
(c)Swiss franc.
(d)Euro.
Answer:
Question Status: Previous Edition
31)Disadvantages of exchange-rate targeting include:
(a)An exchange-rate target has the disadvantage of leaving the country more open to a speculative attack on its currency.
(b)Shocks that change interest rates in the anchor country lead to corresponding changes in interest rates in the target country.
(c)Since an exchange-rate target requires the central bank to tighten monetary policy when there is a tendency for the domestic currency to depreciate or to loosen policy when there is a tendency for the domestic currency to appreciate, the time-consistency problem is more likely to occur.
(d)All of the above are disadvantages.
(e)Only (a) and (b) of the above are disadvantages.
Answer:
Question Status: Revised
32)Disadvantages of exchange-rate targeting include:
(a)An exchange-rate target has the disadvantage of leaving the country less open to a speculative attack on its currency.
(b)Shocks that change interest rates in the anchor country lead to corresponding changes in interest rates in the target country.
(c)Since an exchange-rate target requires the central bank to tighten monetary policy when there is a tendency for the domestic currency to appreciate or to loosen policy when there is a tendency for the domestic currency to depreciate, the time-consistency problem is more likely to occur.
(d)All of the above are disadvantages.
(e)Only (a) and (b) of the above are disadvantages.
Answer:
Question Status: Revised
33)Disadvantages of exchange-rate targeting include:
(a)An exchange-rate target has the disadvantage of leaving the country more open to a speculative attack on its currency.
(b)An exchange-rate target has the disadvantage of weakening the accountability of policymakers, particularly in emerging market countries, because the public finds it harder to ascertain the central bank’s policy actions.
(c)Since an exchange-rate target requires the central bank to tighten monetary policy when there is a tendency for the domestic currency to depreciate or to loosen policy when there is a tendency for the domestic currency to appreciate, the time-consistency problem is more likely to occur.
(d)All of the above are disadvantages.
(e)Only (a) and (b) of the above are disadvantages.
Answer:
Question Status: Revised
34)An emerging market country that successfully used exchange-rate targeting to lower its inflation from above 100 percent in 1988 to below 10 percent in 1994 (before devaluation) was
(a)Thailand.
(b)Mexico.
(c)Philippines.
(d)Indonesia.
Answer:
Question Status: Previous Edition
35)Disadvantages of exchange-rate targeting include:
(a)The targeting country cannot pursue an independent monetary policy.
(b)The targeting country is open to speculative attack on its currency whenever the anchor country pursues tight monetary policy.
(c)The targeting country is open to speculative attack on its currency whenever the anchor country pursues expansionary monetary policy.
(d)Both (a) and (b) of the above.
(e)Both (a) and (c) of the above.
Answer:
Question Status: Previous Edition
36)Disadvantages of exchange-rate targeting include:
(a)The anchor country cannot pursue an independent monetary policy.
(b)The targeting country is open to speculative attack on its currency whenever the anchor country pursues tight monetary policy.
(c)The targeting country is open to speculative attack on its currency whenever the anchor country pursues expansionary monetary policy.
(d)Both (a) and (b) of the above.
(e)Both (a) and (c) of the above.
Answer:
Question Status: Previous Edition
37)Exchange-rate targeting has the disadvantage that
(a)countries lose the ability to pursue a monetary policy that differs from the anchor country.
(b)countries are open to speculative attacks on its currency, especially if unemployment rises.
(c)shocks are transmitted from the anchor country to the domestic economy.
(d)all of the above occur.
(e)only (a) and (b) of the above occur.
Answer:
Question Status: Study Guide
38)(I) Exchange-rate targeting has the disadvantage of leaving the targeting country open to speculative attacks on its currency. (II) Exchange-rate targeting has the advantage of reducing central bank discretion, reducing the likelihood of time-consistent monetary policy.
(a)Both (I) and (II) are true.
(b)Both (I) and (II) are false.
(c)(I) is true, (II) is false.
(d)(I) is false, (II) is true.
Answer:
Question Status: Study Guide
39)The tight monetary policy in Germany following reunification meant that the countries in the European Exchange Rate Mechanism were subject to a _____ shock that led to a decline in economic growth and a rise in unemployment.
(a)negative supply
(b)negative demand
(c)positive supply
(d)positive demand
Answer:
Question Status: Revised
40)When Germany’s tight monetary policy following reunification forced the other countries in the ERM to adopt tight monetary policies to keep their currencies pegged to the mark, speculators
(a)began to doubt that these countries would maintain high interest rates for long.
(b)came to believe that these countries’ commitment to the exchange-rate peg would weaken.
(c)sold the currencies of countries like France, Spain, Sweden, Italy, and the United Kingdom on the expectation that these countries would allow their currencies to depreciate relative to the mark.
(d)did all of the above.
(e)did only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
41)When Germany’s tight monetary policy following reunification forced the other countries in the ERM to adopt tight monetary policies to keep their currencies pegged to the mark, speculators
(a)were convinced that these countries would maintain the tight monetary policy.
(b)came to believe that these countries’ commitment to the exchange-rate peg would not weaken.
(c)sold the currencies of countries like France, Spain, Sweden, Italy, and the United Kingdom on the expectation that these countries would allow their currencies to depreciate relative to the mark.
(d)did all of the above.
(e)did only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
42)(I) The biggest cost of exchange-rate targeting in an industrialized country is the loss of an independent monetary policy. (II) Because of the past record of Italian monetary policy, the Italians were the most favorable of all towards the European Monetary Union.
(a)Both (I) and (II) are true.
(b)Both (I) and (II) are false.
(c)(I) is true, (II) is false.
(d)(I) is false, (II) is true.
Answer:
Question Status: Study Guide
43)Because many emerging market countries have not developed the political or monetary institutions that allow the successful use of discretionary monetary policy,
(a)they have little to gain from pegging their exchange rate to an anchor country like the U.S. or Germany.
(b)they have little to gain from using a nominal anchor, because it would mean a monetary policy that is overly expansionary.
(c)they have very little to gain from an independent monetary policy, but a lot to lose.
(d)they would be better off giving their central bankers the independence to use discretion, rather than take their discretion away through any nominal anchor.
Answer:
Question Status: Previous Edition
44)Emerging market countries are in effect between a rock and a hard place because
(a)they would be wise to adopt the monetary policy of the United States by pegging their currencies to the dollar, but this policy leaves them open to speculative attacks.