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Question
Explain the Taylor rule, including the formula for setting the federal funds rate target, and the components of the formula. If the Fed were to use this rule, how many goals would it use to set monetary policy?
Answer
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Related questions
Q:
This method of financing government spending is frequently called printing money because high-powered money (the monetary base) is created in the process.
A) Financing government spending with taxes.
B) Financing government spending through a Treasury sale of bonds that are then purchased by the Fed.
C) Financing government spending by selling bonds to the public, which pays for the bonds with currency.
D) Financing government spending by selling bonds to the public, which pays for the bonds with checks.
Q:
If the government finances its spending by issuing debt to the public, the monetary base will ________ and the money supply will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) not change; not change
Q:
According to the quantity theory of money demand,
A) an increase in interest rates will cause the demand for money to fall.
B) a decrease in interest rates will cause the demand for money to increase.
C) interest rates have no effect on the demand for money.
D) an increase in money will cause the demand for money to fall.
Q:
If the money supply is $20 trillion and velocity is 2, then nominal GDP is
A) $2 trillion.
B) $10 trillion.
C) $20 trillion.
D) $40 trillion.
Q:
If the money supply is $2 trillion and velocity is 5, then nominal GDP is
A) $1 trillion.
B) $2 trillion.
C) $5 trillion.
D) $10 trillion.
Q:
This theory views shocks to tastes (workers' willingness to work, for example) and technology (productivity) as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output.
A) The natural rate hypothesis
B) Hysteresis
C) Real business cycle theory
D) The Phillips curve model
Q:
A theory of aggregate economic fluctuations called real business cycle theory holds that
A) changes in the real money supply are the only demand shocks that affect the natural rate of output.
B) aggregate demand shocks do affect the natural rate of output.
C) aggregate supply shocks do affect the natural rate of output.
D) changes in net exports are the only demand shocks that affect the natural rate of output.
Q:
If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________.
A) rises; leftward
B) rises; rightward
C) falls; leftward
D) falls; rightward
Q:
Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
Q:
Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
Q:
Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of ________ in aggregate ________ is a rise in both inflation and output in the short-run, but in the long-run the only effect is a rise in inflation.
A) a decrease; supply
B) a decrease; demand
C) an increase; supply
D) an increase; demand
Q:
The short-run aggregate supply curve shifts to the right when
A) output gap is higher.
B) output gap is lower.
C) expected inflation is higher.
D) expected inflation is lower.
Q:
Under the current managed float exchange rate regime, countries with balance of payments deficits frequently do not want to see their currencies depreciate because it makes ________ goods more expensive for ________ consumers and can stimulate inflation.
A) foreign; foreign
B) foreign; domestic
C) domestic; foreign
D) domestic; domestic
Q:
The Bretton Woods system broke down in the early 1970s for all but one of the following reasons:
A) deficit countries losing international reserves were not willing to devalue their currencies.
B) surplus countries were not willing to revalue their currencies upwards.
C) surplus countries were not willing to pursue more expansionary policies.
D) the United States had been pursuing an inflationary monetary policy to reduce domestic unemployment.
Q:
Under the Bretton Woods system, when a country adopted an expansionary monetary policy, thereby causing a balance of payments ________, the country would eventually be forced to implement ________ monetary policy.
A) deficit; expansionary
B) deficit; contractionary
C) surplus; expansionary
D) surplus; contractionary
Q:
Under a fixed exchange rate regime, if a central bank must intervene to purchase the domestic currency by selling foreign assets, then, like an open market sale, this action ________ the monetary base and the money supply, causing the interest rate on domestic assets to ________.
A) increases; rise
B) increases; fall
C) reduces; rise
D) reduces; fall
Q:
The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been known as the
A) General Agreement on Tariffs and Trade.
B) Bretton Woods system.
C) International Settlement Fund.
D) Balance of Payments Compliance Accord.
Q:
Everything else held constant, when actual output exceeds the natural rate of output ________ aggregate supply ________.
A) short-run; decreases
B) short-run; increases
C) long-run; increases
D) long-run; decreases
Q:
________ flexible wages and prices imply that the short-run aggregate supply curve is ________.
A) More; flatter
B) Less; steeper
C) less; vertical
D) More; steeper
Q:
Everything else held constant, which of the following does not cause aggregate demand to increase?
A) An increase in net exports
B) An increase in government spending
C) An increase in taxes
D) An increase in consumer optimism
Q:
Everything else held constant, an increase in financial frictions________ aggregate ________.
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
Q:
Everything else held constant, when financial frictions increase, the real cost of borrowing ________ so that planned investment spending ________ at any given inflation rate.
A) increases; falls
B) decreases; falls
C) decreases; rises
D) increases; rises
Q:
In the liquidity trap, the money demand curve
A) is horizontal.
B) is vertical.
C) is negatively sloped.
D) is positively sloped.
Q:
The theory of portfolio choice indicates that factors affecting the demand for money include
A) income.
B) nominal interest rate.
C) riskiness of money.
D) all the above.
Q:
Keynes's liquidity preference theory indicates that the demand for money is
A) constant.
B) positively related to interest rates.
C) negatively related to interest rates.
D) negatively related to bond values.
Q:
Keynes's model of the demand for money suggests that velocity is
A) constant.
B) positively related to interest rates.
C) negatively related to interest rates.
D) positively related to bond values.
Q:
Keynes hypothesized that the transactions component of money demand was primarily determined by the level of
A) interest rates.
B) velocity.
C) income.
D) stock market prices.
Q:
The Keynesian theory of money demand emphasizes the importance of
A) a constant velocity.
B) irrational behavior on the part of some economic agents.
C) interest rates on the demand for money.
D) expectations.
Q:
The quantity theory of money is a theory of how
A) the money supply is determined.
B) interest rates are determined.
C) the nominal value of aggregate income is determined.
D) the real value of aggregate income is determined.
Q:
Hong Kong chooses to have ________ and ________ and therefore, cannot have an independent monetary policy at the same time.
A) capital control, a fixed exchange rate
B) free capital mobility, a fixed exchange rate
C) free capital mobility, a flexible exchange rate
D) capital control, a flexible exchange rate