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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Generally, the holder of a government bond that is indexed to the price level knows
A. either the interest rate, the principal, or both are adjusted for inflation
B. the real interest rate will fluctuate with inflation
C. there will be no losses as long as inflation is anticipated, but losses can occur if there is an unanticipated increase in the inflation rate
D. all of the above
E. none of the above
Which of the following is FALSE?
A. automatic cost-of-living adjustments in formal labor contracts are common in many countries
B. wage indexation is more prevalent in countries where uncertainty about inflation is high
C. wage indexation is very widespread in the U.S.
D. an unanticipated increase in the inflation rate will increase the government’s real tax revenue
E. a government bond that is indexed to the price level will have either the interest, the principal, or both adjusted for inflation
A central bank that wants to stabilize the economy in the short run should try to
A. establish a clear inflation target and stick to it no matter what
B. affect aggregate supply through open market operations
C. affect aggregate demand through open market operations
D. maintain a stable growth rate of money supply
E. concentrate only on long-run goals
In the short run, a central bank can most easily stimulate economic activity by
A. selling government bonds to the public
B. raising interest rates to make investments more profitable
C. lowering the inflation rate though monetary restriction
D. influencing aggregate supply through monetary expansion
E. influencing aggregate demand and accepting a higher price level in the future
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