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Economics > Econ Test 3 - Conducy of Monetary Policy: Strategy and Tactics > Flashcards

Econ Test 3 - Conducy of Monetary Policy: Strategy and Tactics Flashcards

0
Q

What do central bankers define as low and stable inflation?

A

price stability

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1
Q

What do central bankers define price stability as?

A

low and stable inflation

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2
Q

Why is price stability desirable?

A

a rising price level creates uncertainty in the economy which might hamper economic growth

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3
Q

What is inflation?

A

a rising price level

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4
Q

What does inflation do to the economy?

A

creates uncertainty in the economy which might hamper economic growth

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5
Q

When is the information conveyed by the prices of goods and services harder to interpret?

A

When the overall level of prices is changing

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6
Q

How doe the public feel towards inflation?

A

hostile

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7
Q

A nominal variable such as the inflation rate or the money supply, which ties down the price level to achieve price stability.

A

nominal anchor

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8
Q

What is a central element in successful monetary policy?

A

The use of a nominal anchor

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9
Q

What does adhering to a nominal anchor do to price stability?

A

promotes it by promoting low inflation expectations

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10
Q

What is monetary policy conducted on discretionary, day by day basis leading to poor long-run outcomes?

A

time-inconsistency problem

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11
Q

An example of the time-inconsistency problem

A

A New Years resolution to lose weight but the short-run is easier than the long-run gains

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12
Q

Why is the best policy to not pursue expansionary policy?

A

because people see a central bank pursuing expansionary policy workers and firms will raise expectations about inflation

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13
Q

What happens when workers and firms raise their expectations about inflation?

A

drives wages and prices up

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14
Q

Five goals continually mentioned by central bank officals?

A 
high employment
econ growth
stability of markets
interest rate stability
foregin exhange market stability
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15
Q

What does unemployment result in?

A

Loss of output or lower GDP

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16
Q

What are searches by workers and firms to find suitable matchups?

A

frictional unemployment

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17
Q

A mismatch between job requirements and the skills or availability of local workers

A

structural unemployment

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18
Q

The goal for high employment is?

A

a level above zero consistent with full employment a which the dmeand for labor equals the supply of labor

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19
Q

When the demand for labor equals the supply of labor

A

natural rate of unemployment

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20
Q

The rate of output tied to the natural rate of unemployment

A

potential output or natural rate of output

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21
Q

What do upward movements in interest rates generate?

A

Hostility toward central banks and a demand that their power be curtailed

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22
Q

What generates hostility toward central banks and leads to demands that banks powers be curtailed?

A

upward movements in interest rates

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23
Q

How does an increase in interest rates affect affect long-term bonds and mortages?

A

produce large capital losses

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24
Q

Why is interest-rate stability desirable?

A

because fluctuations in interest rates can create uncertainty in the economy and make it harder to plan for the future

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25
Q

A rise in the value of the dollar makes American industries less/more competitive with those abroad?

A

less

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26
Q

A decline in the value of the dollar does what to inflation in the United States?

A

stimulates

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27
Q

Preventing large changes in the value of the dollar makes it easier for firms and individuals to do what?

A

plan ahead

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28
Q

Does higher inflation affect employment in the long run?

A

NO

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29
Q

In the short run price stability conflicts with what?

A

the goals of output stabliity and interest rate stability

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30
Q

How would a central bank prevent an overheating of the economy?

A

raising interest rates

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31
Q

How does a rise in interest rates affect output initially?

A

cause output to fall

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32
Q

What is the primary long-run goal for central banks?

A

price stability

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33
Q

Mandates that put the goal of price stability first and then say that as long as it is achieved other goals can be pursued

A

hierarchical mandates

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34
Q

Long-term interest rates will be high if what is high?

A

inflation

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35
Q

What is to achieve two coequal objectives: price stability and maximum employment?

A

dual mandate

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36
Q

What are the goals of the dual mandate?

A

price stability and maximum employment

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37
Q

What is the difference between dual mandate and hiearchical mandate?

A

Hiearchical focuses on one objective while dual focuses on two coequal objectives

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38
Q

What kind of inflation rates promote economic growth?

A

Low and stable

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39
Q

Why do central bankers often favor hierarchical mandates to dual mandates?

A

concerns that a dual mandate might lead to overly expansionary policy

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40
Q

When does a dual mandate become a problem?

A

When price stability is a short-term goal

When expansionary policies are pursued as short-run goals

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41
Q

Are either type of mandate acceptable?

A

yes

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42
Q

What includes public announcement of inflation objectives, commitiment to price stability, information-inclusive approach using many variables, transparency of the monetary poly strategy though public comm, and increased central bank accountability?

A

inflation targeting

43
Q

What was the first count to adopt inflation targeting?

A

New Zealand

44
Q

A key advantage of inflation targeting is that it can help focus the political debate on what?

A

What a central bank can do in the long run, rather than what it can not do

45
Q

Can a central bank permanently increase economic growth and the number of jobs through expansionary monetary policy?

A

NO

46
Q

Inflation targeting has the potential to reduce the likelihood that the central bank will fall into what?

A

the time-inconsistency trap

47
Q

Does the public understand inflation targeting?

A

YES

48
Q

What can the New Zealand regime do if the inflation target is breached, even for one quarter?

A

Dismiss the Reserve Bank’s governor

49
Q

Inflation targeting has made who highly accountable?

A

The central bank

50
Q

How would you classify the success of inflation targeting?

A

Quite good.

51
Q

What are delayed signaling, too much rigidity, potential for increased output fluctuations, and low economic growth?

A

Disadvantages of Inflation Targeting

52
Q

What is the issue of the inflation target being unable to send immediate signals to the public and the markets about the stance of the monetary policy?

A

Delayed signaling

53
Q

What is the complaint about the rigidity of inflation targeting?

A

Limits the ability of monetary policymakers to respond to unforseen circumstances

54
Q

Why must monetary policy be forward-looking and preemptive?

A

to prevent inflation from getting started because if they start when inflation is reported then it’s already too late

55
Q

The Fed’s forward looking behavior and “just do it” approach helps to discourage what?

A

overly expansionary monetary policy

56
Q

Discouraging an overly expansionary monetary policy does what to the time-inconsistency problem?

A

ameliorates it

57
Q

Has the Fed’s “just do it” approach worked in the past?

A

YES

58
Q

What is the most serious problem with the Fed’s “just do it” approach?

A

Its strong dependence on the preferences, skills, and trust of the individuals in charge of the central bank.

59
Q

Is the Feds “Just do it” approach transparent?

A

NO

60
Q

What kind of impact do developments in the financial sector have on economic activity?

A

far greater than earlier realized

61
Q

Why can zero-lower-bound on interest rates be a serious problem?

A

It forces the Federal Reserve to use nonconventional monetary policy tools that are harder to use effectively.

62
Q

What is the cost of cleaning up after a financial crisis?

A

Very high

63
Q

Does price and output stability ensure financial stability?

A

NO

64
Q

What is the typical inflation target?

A

2%

65
Q

What are pronounced increases in asset prices that depart from fundamental values which eventually burst resoundingly?

A

asset-price bubbles

66
Q

Are asset-price bubbles easy to identify?

A

No they are nearly impossible

67
Q

Are increases in interest rate an effective tool in trying to restrain bubbles?

A

No, in fact it has often caused a bubble to burst more severly

68
Q

Why are monetary policies ineffective against asset-price bubbles?

A

These policies target the general view instead of the specific asset experiencing a bubble

69
Q

How does a rise interest rates affect employment?

A

raises unemployment

70
Q

How can policymakers keep the harmful affects of a burst asset-price bubble to a minimum?

A

By responding in a timely fashion

71
Q

Characterized by a surge in prices that raises expectations until the bubble bursts and prices rapidly revert to an objectively-based level

A

Asset-price bubble

72
Q

What can a credit-driven bubble cause that is so dangerous?

A

a feedback loop

73
Q

When a credit boom drives up asset prices which in turn fuels the credit boom which drives asset prices even higher and so on

A

the feedback loop

74
Q

What happens to the feedback loop when the credit-driven bubble bursts?

A

the loop reverses and loans go sour and demand for assets declines

75
Q

What is the key principle in designing effective policies to lean against credit booms?

A

curb excessive risk taking

76
Q

Regulatory policy to affect what is happening in credit markets in the aggregate is referred to as?

A

macroprudential regulation

77
Q

A variable that responds to the central bank”s tools and indicates the stance of monetary policy?

A

policy instrument

78
Q

What are the two basic types of policy instruments that the Fed has at its disposal?

A

reserve aggragates

interest rates

79
Q

A rightward or leftward shift in the demand curve for reserves leads to what?

A

fluctuations in the federal funds rate

80
Q

A right or left shift in the demand curve for reserves leads to the central bank doing what?

A

shift the supply curve of reserves so that the federal rate does not change

81
Q

Are interest-rate and reserve aggregate compatible?

A

NO

82
Q

What two policies must the central bank choose between?

A

interest rate

reserve aggregate

83
Q

What is the interest rate that is easiest to measure and observe?

A

the nominal interest rate

84
Q

What are more observable: interest rates or reserve aggregates?

A

short term interest rates

85
Q

What criteria is used when selecting a policy instrument?

A

observability
controllability
predictable effects

86
Q

If a variable is to function as a useful policy instrument what must a central bank be able to do?

A

exercise effective control over it

87
Q

If the central bank cannot control the policy instrument then what happens?

A

the bank won’t be able to get the policy back on track

88
Q

What is the most important characteristic of a policy instrument?

A

It must have a predictable effect on a goal

89
Q

What policy instrument do central banks throughout the world generally use these days?

A

short-term interest rates

90
Q

Who coined the Taylor Rule?

A

John Taylor of Stanford fame

91
Q

This rule indicates that the federal funds rate should be set equal to the inflation rate plus and equlibrium real feds fun rate plus a weighted average of two gaps.

A

Taylor Rule

92
Q

According to the Taylor rule

Federal funds rate target =

A

inflation rate + equilibrium real fed funds rate + 1/2(inflation gap) + 1/2(output gap)

93
Q

The principle that the monetary authorities should raise nominal interest rates by more than the increase in the inflation rate has been named?

A

The Taylor Principle

94
Q

What happens if real interest rates fall when inflation rises?

A

Serious instability occurs

95
Q

If the Taylor principle is not followed what occurs?

A

nominal rates rise by less than the rise in inflation

96
Q

This theory indicates that changes in inflation are influenced by the state of the economy relative to its productive capacity as well as by other factors

A

Phillips Curve Theory

97
Q

What does NAIRU stand for?

A

non accelerating inflation rate of unemployment

98
Q

If the unemployment rate is above NAIRU with output below potential then what will happen to inflation?

A

Inflation will come down

99
Q

If the unemployment rate is below NAIRU with output above potential, what will happen to inflation?

A

rise

100
Q

Taylor’s rule suggests that the Fed increase interest rates when?

A

times of high inflation or when employment is too high

101
Q

Taylor’s rule suggests the Fed decreases interest rates when?

A

Times of low inflation or when employment is below full employment levels

102
Q

What is the key element in a successful monetary policy?

A

having a strong nominal anchor

103
Q

How does a nominal anchor promote price stability?

A

tying down inflation expectations

limiting time-inconsistency problems

104
Q

What are developments in the financial sector have a greater impact on econ than earlier realized, zero-lower-bound interest can be a serious problem, the cost of cleaing up after a financial crisis is high, and price and output stability do not ensure financial stability?

A

Four lessons that can be learned from the global financial crisis

105
Q

The lessons from the financial crisis provide an argument for what?

A

More flexible inflation targeting

106
Q

What did the argument for not responding to bubbles in general rest on?

A

Expectations that market participants are smarter than Fed officials and would know when asset prices are out of line

Economics (5 decks)

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