monetary policy and Fiscal policy quiz

More frequent and current economic data would make it easier for authorities to monitor the economy and to recognize problems. The reduction in the time between economic reports should reduce the recognition lag

The three qualities of effective central banks are independence, credibility, and transparency

Influencing the level of aggregate demand through taxation and government spending is an objective of fiscal policy. Controlling inflation and interest rates are typical objectives of monetary policy

Given the equation of exchange, MV = PY, an increase in the money supply is consistent with an increase in nominal GDP (PY). However, a decrease in velocity is consistent with a decrease in nominal GDP. Unless we know the size of the changes in the two variables, there is no way to tell what the net impact is on real GDP (Y)
and prices (P)

Money functions as a unit of account, a medium of exchange, and a store of value. Money existed long before the idea of central banking was conceived

The money supply growth rate may need to be adjusted to keep the exchange rate within acceptable bounds, but is not necessarily the same as that of the other country. The other two statements are true

Open market purchases by monetary authorities decrease the interbank lending rate by increasing excess reserves that banks can lend to one another and therefore increasing their willingness to lend

The Fisher effect states that nominal interest rates are equal to the real interest rate plus the expected inflation rate

Crowding out refers to the possibility that government borrowing causes interest rates to increase and private investment to decrease. If government debt is financing the growth of productive capital, this should increase future economic growth and tax receipts to repay the debt. Ricardian equivalence is the theory that if
government debt increases, private citizens will increase savings in anticipation of higher future taxes, and it is an argument against being concerned about the size of government debt and budget deficits

Monetary policy has limited ability to act effectively against deflation because the policy rate cannot be reduced below zero and demand for money may be highly elastic (liquidity trap)

Decreasing the overnight lending rate would add reserves to the banking system, which would encourage bank lending, expand the money supply, reduce interest rates, and allow GDP growth and the rate of inflation to increase. Selling government securities or increasing the reserve requirement would have the opposite effect,
reducing the money supply and decreasing the inflation rate

Central bank goals often include maximum employment, which is interpreted as the maximum sustainable growth rate of the economy; stable prices; and moderate (not minimum) long-term interest rates

The primary method by which a central bank conducts monetary policy is through changes in the target short-term rate or policy rate

Both monetary and fiscal policies primarily strive to achieve economic targets such as inflation and GDP growth. Balancing the budget is not a goal for monetary policy and is a potential outcome of fiscal policy. Fiscal policy (but not monetary policy) may secondarily be used as a tool to redistribute income and wealth

Tight monetary policy and loose fiscal policy both lead to higher interest rates. Tight monetary policy decreases private sector growth, while loose fiscal policy expands the public sector, reducing the overall share of private sector in the GDP

neutral rate = trend rate + inflation target = 2% + 4.5% = 6.5%

Because the policy rate is less than the neutral rate, monetary policy is expansionary

The money supply schedule is vertical because the money supply is independent of interest rates. Central banks control the money supply

An increase in the policy rate is likely to increase longer-term interest rates, causing decreases in consumption spending on durable goods and business investment in plant and equipment. The increase in rates, however, makes investment in the domestic economy more attractive to foreign investors, increasing demand for the domestic currency and causing the currency to appreciate

Exchange rate targeting requires monetary policy to be consistent with the goal of a stable exchange rate with the targeted currency, regardless of domestic economic conditions

Money neutrality is the theory that changes in the money supply do not affect real output or the velocity of money. Therefore, an increase in the money supply can only increase the price level