Macroeconomics, 3e (Williamson) Chapter 17

Inflation, the Phillips Curve, and Central Bank Commitment

1)

The existence of large government budget deficits A)

offers the most convincing explanation of both moderate inflations and hyperinflations. B)

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

C)

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

D)

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

C Question Status:

Previous Edition

2)

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

A)

rate of change in prices. B)

rate of change in nominal wages. C)

rate of change in real wages. D)

level of nominal wages. Answer:

B Question Status:

Previous Edition

3)

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

1950s. B)

1960s. C)

1970s. D)

1980s. Answer:

B Question Status:

Previous Edition

4)

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

1960s. B)

1970s. C)

1980s. D)

1990s. Answer:

B Question Status:

Previous Edition

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:

A Question Status:

Previous Edition

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:

B Question Status:

Previous Edition

7)

According to the Friedman-Lucas money surprise model, we should expect a stable relationship 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 the inflation rate from what it is expected to be and the level of real output from trend.

D)

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

Answer:

D Question Status:

Previous Edition

8) In the Friedman-Lucas money surprise model, an increase in the growth of nominal wages

could signal either A)

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

B)

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

C)

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

D)

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

Answer:

A Question Status:

New

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

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

B Question Status:

New

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

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

D Question Status:

New

11)

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

has no effect on inflation. B)

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

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

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

B Question Status:

New

12)

In the Friedman-Lucas money surprise model, any increase in output due to a surprise increase in money supply growth

A)

always improves the performance of the economy. B)

sometimes improves the performance of the economy. C)

never increases the performance of the economy. D)

is an impossibility. Answer:

C Question Status:

New

13)

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

A)

trend and deviations of real output from trend. B)

trend and deviations in real output from what it is expected to be. C)

what it is expected to be and deviations of real output from trend. D)

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

C Question Status:

Previous Edition

14)

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

low and stable. B)

low and variable. C)

high and stable. D)

high and variable. Answer:

D Question Status:

Previous Edition

15)

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

A)

relatively low variations in real output from trend.

B)

relatively constant expected inflation. C)

relatively stagnant periods of economic growth. D)

accelerating inflation. Answer:

B Question Status:

Previous Edition

16)

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

A)

Alan Greenspan and Paul Volcker. B)

Paul Volcker and Arthur Burns. C)

Arthur Burns and G. William Miller. D)

G. William Miller and Alan Greenspan. Answer:

A Question Status:

Previous Edition

17)

According to the Central Bank Learning Story, the central bank A)

always prefers lower inflation and higher output. B)

always prefers lower inflation and sometimes prefers higher output. C)

sometimes prefers lower inflation and always prefers higher output. D)

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

C Question Status:

Previous Edition

18)

According to the Central Bank Learning Story, if the central bank believes that the Phillips curve 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:

D Question Status:

Previous Edition

19)

According to the Central Bank Learning Story, if the central bank tries to increase real output 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:

D Question Status:

Previous Edition

20)

Application of the Central Bank Learning Story to the U.S. economy in the later part of the twentieth century suggests that the Federal Reserve began to understand that increases in 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:

B Question Status:

Previous Edition

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:

C Question Status:

Previous Edition

22)

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

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

B)

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

C)

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

D)

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

Answer:

B Question Status:

Previous Edition

23)

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

time inconsistency. B)

adverse selection. C)

moral hazard. D)

externalities. Answer:

A Question Status:

Previous Edition

24)

Time inconsistency means A)

taking different decisions at different times despite facing the same situation. B)

making policy choices that violate the intertemporal budget constraint. C)

deciding to do something tomorrow, and then doing something different tomorrow. D)

adding a random factor to decisions. Answer:

C Question Status:

New

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 expectations hypothesis. C)

information efficiency hypothesis. D)

principle of maximizing behavior. Answer:

B Question Status:

Previous Edition

26)

The rational expectations hypothesis means that

A)

economic agents can predict the future. B)

economic agents do not make systematic errors. C)

everyone expects everyone else to act rationally. D)

economic agents reason with expectations. Answer:

B Question Status:

New

27)

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

A)

Milton Friedman and Robert Lucas. B)

Michael Hutchinson and Carl Walsh. C)

Finn Kydland and Edward Prescott. D)

Robert Barro and Donald Gordon. Answer:

C Question Status:

Previous Edition

28)

Application of the time inconsistency problem to monetary policy suggests that, without some mechanism to ensure commitment, the

A)

rate of inflation will be higher than it would be with commitment. B)

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

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

D)

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

Answer:

A Question Status:

Previous Edition

29)

According to the Central Bank Commitment Story A)

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

central bank discretion is dangerous. C)

central banks need to be isolated from political considerations. D)

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

Answer:

B Question Status:

Previous Edition

30)

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

A)

explained equally well by the Central Bank Learning Story and the Central Bank

Commitment Story. B)

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

C)

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

D)

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

Answer:

B Question Status:

Previous Edition

31)

Current monetary arrangements in Hong Kong are centered on A)

a central bank with considerable discretion in combating business cycle fluctuations. B)

explicit targets for growth rates of the monetary aggregates. C)

a pure currency board with no discretion. D)

a currency board without legally binding future commitments. Answer:

D Question Status:

Previous Edition

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:

B Question Status:

Previous Edition

33)

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

can be explained equally plausibly by the Central Bank Learning Story and the Central Bank Commitment Story.

B)

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

C)

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

D)

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

Answer:

B Question Status:

Previous Edition