Macroeconomics, 3e (Williamson) Chapter 17

Inflation, the Phillips Curve, and Central Bank Commitm ent

1)

The

existence of large government budget deficits A)

offers the B)

most convincing explanation of both moderate inflations and hyperinflations.

offers a convincing

C)

explanation for moderate inflations, but is less successful in explaining hyperinflations.

offers a convincing

D)

explanation for hyperinflations, but is less successful in explaining moderate inflations.

is rarely an important factor in either moderate inflations or hyperinflations. Answer:

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2)

A.W. study of unemployment and inflation in the United Kingdom specifically looked at Phillips' the empirical relationship between the unemployment rate and the A)

rate of B)

change in prices.

rate of C)

change in nominal wages.

rate of D)

change in real wages.

level of

nominal wages. Answer:

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3)

Phillips curve relationship best fits the U.S. data in the A)

1950s. B)

1960s. C)

1970s. D)

1980s. Answer:

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4)

The

Phillips curve relationship in the U.S. data began to disintegrate in the A)

1960s. B)

1970s. C)

1980s. D)

1990s. Answer:

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5)

Of the

following four decades, the observed U.S. Phillips curve was steepest in the A)

1960s. B)

1970s. C)

1980s. D)

1990s. Answer:

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6)

Of the

following four decades, the average U.S. inflation rate was highest in the A)

1960s. B)

1970s. C)

1980s. D)

1990s. Answer:

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7)

Accordi the Friedman-Lucas money surprise model, we should expect a stable relationship ng to between A)

the inflation rate and the level of real output. B)

the inflation rate and deviations of real output from trend. C)

deviations in rate from what it is expected to be and the level of real output from trend. the inflation D)

deviations in rate from what it is expected to be and deviations in real output from trend. the inflation Answer:

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8)

In the n-Lucas money surprise model, an increase in the growth of nominal wages could Friedma signal either A)

an increase rate of money supply or an increase in the growth of total factor productivity. in the growth B)

an increase rate of money supply or a decrease in the growth of total factor productivity. in the growth C)

a decrease in rate of money supply or an increase in the growth of total factor productivity. the growth D)

a decrease in rate of money supply or a decrease in the growth of total factor productivity. the growth Answer:

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9)

In the

Friedman-Lucas money surprise model, a surprise increase in money supply growth A)

increases the consumer's estimate of the real wage and increases the actual real wage. B)

increases the consumer's estimate of the real wage and decreases the actual real wage. C)

decreases D)

the consumer's estimate of the real wage and increases the actual real wage.

decreases the consumer's estimate of the real wage and decreases the actual real wage. Answer:

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10)

In the

Friedman-Lucas money surprise model, a surprise increase in money supply growth A)

increases the real wage and increases the real interest rate. B)

increases the real wage and decreases the real interest rate. C)

decreases D)

the real wage and increases the real interest rate.

decreases the real wage and decreases the real interest rate. Answer:

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11)

In the

Friedman-Lucas money surprise model, a surprise increase in money supply growth A)

has no effect on inflation. B)

increases C)

inflation less than in proportion to the growth rate of the money supply.

increases D)

inflation in an equal proportion to the growth rate of the money supply.

increases inflation more than in proportion to the growth rate of the money supply. Answer:

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12)

In the n-Lucas money surprise model, any increase in output due to a surprise increase in Friedma money supply growth A)

always B)

improves the performance of the economy.

sometimes C)

improves the performance of the economy.

never D)

increases the performance of the economy.

is an

impossibility. Answer:

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13)

Accordi the Friedman-Lucas money surprise model, we should expect a stable relationship ng to between deviations in the inflation rate from A)

trend and B)

deviations of real output from trend.

trend and C)

deviations in real output from what it is expected to be.

what it is D)

expected to be and deviations of real output from trend.

what it is

expected to be and deviations in real output from what it is expected to be. Answer:

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14)

In the

United States during the 1970s, the inflation rate was relatively A)

low and B)

stable.

low and C)

variable.

high and D)

stable.

high and

variable. Answer:

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15)

Accordi the Friedman-Lucas money surprise model, a stable Phillips curve relationship is ng to most likely in periods of A)

relatively low variations in real output from trend. B)

relatively C)

constant expected inflation.

relatively D)

stagnant periods of economic growth.

accelerating inflation. Answer:

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16)

Credit for the

reduction of the inflation rate in the 1980s and its subsequent stability is often credited to A)

Alan B)

Greenspan and Paul Volcker.

Paul Volcker and Arthur Burns. C)

Arthur Burns and G. William Miller. D)

G. William Miller and Alan Greenspan. Answer:

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17)

Accordi ng to the Central Bank Learning Story, the central bank A)

always B)

prefers lower inflation and higher output.

always C)

prefers lower inflation and sometimes prefers higher output.

sometimes D)

prefers lower inflation and always prefers higher output.

sometimes prefers lower inflation and sometimes prefers higher output. Answer:

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18)

Accordi the Central Bank Learning Story, if the central bank believes that the Phillips curve ng to relationship is stable, it will choose a point at which real output will be A)

below trend and inflation will be lower than expected inflation. B)

below trend and inflation will be higher than expected inflation. C)

above trend and inflation will be lower than expected inflation. D)

above trend and inflation will be higher than expected inflation. Answer:

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19)

Accordi the Central Bank Learning Story, if the central bank tries to increase real output ng to above its original trend permanently, it will A)

succeed in its real

output goal, but at the cost of a constant, permanently higher rate of inflation. B)

succeed in its real

output goal, but at the cost of a permanently accelerating rate of inflation. C)

fail in its real output goal, but will not increase the rate of inflation. D)

fail in its real output goal and increase the equilibrium rate of inflation. Answer:

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20)

Applicat Central Bank Learning Story to the U.S. economy in the later part of the twentieth ion of century suggests that the Federal Reserve began to understand that increases in the expected inflation shift the Phillips curve upward A)

in the early 1970s. B)

in the early 1980s. C)

in the early 1990s. D)

Even now the Federal Reserve appears not to have learned this lesson. Answer:

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21)

Which of the

following countries has the most explicit objectives and penalties for its central bank? A)

Canada B)

England C)

New Zealand D)

United

States Answer:

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22)

The

Reserve Bank of New Zealand Act is unusual in that it only specifies A)

inflation as a objective and because it empowers the legislature to remove the central bank policy governor if the objectives are not met. B)

inflation as a objective and because it empowers the prime minister to remove the central policy bank governor if the objectives are not met. C)

real output as a policy

D)

objective and because it empowers the legislature to remove the central bank governor if the objectives are not met.

real output objective and because it empowers the prime minister to remove the central as a policy bank governor if the objectives are not met. Answer:

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23)

The

Central Bank Commitment Story is based upon an incentive problem due to A)

time B)

inconsistency.

adverse C)

selection.

moral D)

hazard.

externalities. Answer:

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24)

Time

inconsistency means A)

taking B)

different decisions at different times despite facing the same situation.

making C)

policy choices that violate the intertemporal budget constraint.

deciding to D)

do something tomorrow, and then doing something different tomorrow.

adding a

random factor to decisions. Answer:

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25)

The idea

that economic agents do not make systematic errors because they use all information efficiently is called the A)

consistency hypothesis. B)

rational C)

expectations hypothesis.

information efficiency hypothesis. D)

principle of maximizing behavior. Answer:

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26)

The

rational expectations hypothesis means that A)

economic B)

agents can predict the future.

economic C)

agents do not make systematic errors.

everyone D)

expects everyone else to act rationally.

economic agents reason with expectations. Answer:

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27)

The work on the application of the time inconsistency problem in macroeconomics is original due to A)

Milton B)

Friedman and Robert Lucas.

Michael C)

Hutchinson and Carl Walsh.

Finn Kydland and Edward Prescott. D)

Robert Barro and Donald Gordon. Answer:

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28)

Applicat the time inconsistency problem to monetary policy suggests that, without some ion of mechanism to ensure commitment, the A)

rate of B)

inflation will be higher than it would be with commitment.

level of real output will be lower than it would be with commitment. C)

rate of be higher and the level of real output will be lower than they would be with inflation will commitment. D)

rate of the level of real output will be higher than they would be with commitment. inflation and Answer:

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29)

Accordi ng to the Central Bank Commitment Story A)

central B)

banks need to be given wide latitude in using their discretion.

central bank discretion is dangerous. C)

central D)

banks need to be isolated from political considerations.

central be responsible to the executive, as opposed to the legislative, branch of banks should government. Answer:

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30)

The run U.S. inflation in the 1970s and the subsequent decline in U.S. inflation in the 1980s up in and 1990s is A)

explained by the Central Bank Learning Story and the Central Bank Commitment Story. equally well B)

well the Central Bank Learning Story, but not well explained by the Central Bank explained by Commitment Story. C)

well the Central Bank Commitment Story, but not well explained by the Central explained by Bank Learning Story. D)

not well either the Central Bank Learning Story or the Central Bank Commitment Story. explained by Answer:

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31)

Current monetary arrangements in Hong Kong are centered on A)

a central B)

bank with considerable discretion in combating business cycle fluctuations.

explicit C)

targets for growth rates of the monetary aggregates.

a pure D)

currency board with no discretion.

a currency board without legally binding future commitments. Answer:

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32)

Control of inflation by means of a currency board has A)

worked quite well both in Argentina and Hong Kong. B)

worked well in Hong Kong, but had to be abandoned by Argentina in 2002. C)

worked well in Argentina, but had to be abandoned by Hong Kong in 1999. D)

failed in

Argentina in 1999 and failed in Hong Kong in 2002. Answer:

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33)

The U.S. inflation experience from 1960-1999 A)

can be explained

B)

equally plausibly by the Central Bank Learning Story and the Central Bank Commitment Story.

can be the Central Bank Learning Story, but not the Central Bank Commitment Story. explained by C)

can be the Central Bank Commitment Story, but not the Central Bank Learning Story. explained by D)

cannot be either the Central Bank Learning Story or the Central Bank Commitment Story. explained by Answer:

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