37. Monetary Rules.
Suppose that a central bank is required to follow a monetary policy rule to stabilize prices. If the
economy starts at long-run equilibrium and then Aggregate Demand shifts right, what should the central
bank do, and what will happen to output?
a. The central bank should increase the Money Supply, which causes output to move closer
to its long-run equilibrium.
b. The central bank should increase the Money Supply, which causes output to move
farther from its long-run equilibrium.
c. The central bank should decrease the Money Supply, which causes output to move closer
to its long-run equilibrium.
d. The central bank should decrease the Money Supply, which causes output to move
farther from its long-run equilibrium.
38. Rules vs. Discretion
Why should monetary policy be made by rule rather than discretion?
a. because there is a clear consensus among economists about what a good monetary
policy rule would be
b. because rules would eliminate the political business cycle
c. because rules respond to any random shocks in the economy
d. because rules create time inconsistency
39. Zero Inflation Targeting
Proponents of zero inflation argue that reducing inflation involves which of the following?
a. permanent costs and temporary benefits
b. temporary costs and permanent benefits
c. permanent costs and benefits
d. temporary costs and benefits
40. Deficit Financing
Why should the government balance its budget?
a. because government debt imposes higher taxes or more borrowing on current
generations
b. because a balanced budget will smooth the business cycle
c. because deficits increase national saving
d. because recent history shows that the government will not run deficits unless they are
Justified by war or recession
