If a central bank wants to make sure that its policy actions are successful in manipulating interest rates to stabilize the economy around its full-employment level it should
A. be prepared to make modest and frequent adjustments after receiving feedback on how its actions affect the economy
B. never announce its intentions, because financial markets will always overreact
C. frequently change its policies to keep financial markets guessing
D. react to excess inflation but not to economic booms
E. all of the above
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A central bank that follows the Taylor rule
A. will not react to economic disturbances until its full effects are felt
B. assumes there is no tradeoff between unemployment and inflation
C. keeps the growth rate of money supply constant
D. sets interest rates based on current economic conditions
E. will start selling government bonds as soon as interest rates start to rise
The Taylor rule suggests to a central bank
A. how to set interest rates in response to a change in economic activity
B. that interest rates should be raised by 1.5% if inflation goes 1% above its announced target
C. that interest rates should be raised by 0.5% if the GDP gap rises by 1%
D. that real interest rates should be increased to cool off the economy whenever inflation rises
E. all of the above
Slowing economic activity by increasing interest rates will generally be successful since
A. investment spending will be reduced
B. spending on durable goods will be reduced
C. aggregate supply will decrease
D. all of the above
E. only A) and B)
Assume that the inflation coefficient is negative in the Taylor rule, This implies that
A. there is an implicit monetary policy tradeoff between inflation and unemployment
B. the Fed will have to lower money supply whenever aggregate demand decreases
C. the Fed will not have to make adjustments in interest rates if output changes
D. the economy is likely to experience runaway inflation
E. all of the above
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