When a central bank engages in inflation targeting, then
A. interest rate stability will automatically result
B. interest rates need to be raised as soon as the output gap starts to shrink
C. the Taylor rule can still be used as a guide as long as the output coefficient is set to zero
D. the Taylor rule can still be used as a guide as long as the output coefficient has a lot of weight
E. none of the above
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If a central bank follows an activist monetary policy rule,
A. full employment can always be maintained with little or no inflation
B. financial markets always need advance notice of any policy change so the central bank does not lose its credibility
C. the focus is generally on expected future economic conditions while current economic conditions are ignored
D. the focus is generally on the long-run inflation rate with little concern about unemployment
E. none of the above
Assume the Fed wants to stimulate economic activity through expansionary monetary policy. Which of the following is FALSE?
A. investment spending will increase
B. spending on durable goods will increase
C. aggregate demand will be stimulated
D. the expansionary effect will only be temporary
E. real money balances will increase as we move along the AD-curve from left to right
The Taylor rule
A. advocates lowering interest rates in response to a higher output level
B. advocates a strict monetary growth rate
C. advocates stable interest rates
D. helps a central bank in setting its target interest rates based on current economic conditions
E. is of little help in the short-term stabilization of the economy
The Taylor rule implies that a central bank should adjust interest rates frequently
A. with particular emphasis on capital movements across borders
B. but only in response to changes in the inflation rate
C. but only in response to changes in the output gap
D. whenever output or inflation deviates from the desired levels
E. none of the above
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