Intermediate Macroeconomics 5econ011C-n Tutorial 11: Monetary Policy a summing Up

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Tutorial 11 - Monetary Policy - A Summing Up
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Intermediate Macroeconomics 5ECON011C-n 
Tutorial 11: Monetary Policy - A Summing Up 
1) The nominal interest 
A) will never be negative. 
B) can be negative if inflation is unexpected. 
C) can be negative if the inflation rate is greater than the nominal 
interest rate. 
D) can be negative if deflation occurs. 
E) can be negative when the real interest rate is negative. 
2) For this question, assume that the CB sets monetary policy according 
to the Taylor rule. Suppose current macroeconomic conditions are 
represented by the following: 𝜋 > 𝜋

and 𝑢 = 𝑢
. Given this 
information, we would expect that the Fed will 
A) implement a monetary contraction. 
B) implement a monetary expansion. 
C) maintain its current stance of monetary policy. 
D) more information is need to answer this question. 
3) Which of the following is an example of the "shoe-leather costs" of 
A) a rise in the cost of primary raw materials, like leather for shoes 
B) an artificial rise in the capital gains tax 
C) the need to take more trips to the bank 
D) miscalculations due to money illusion 
E) All of the above 
4) The existence of inflation does which of the following? 
A) reduces tax distortions 
B) reduces shoe-leather costs 
C) allows for the possibility of negative real interest rates 
D) reduces the costs associated with money illusion 

Intermediate Macroeconomics 5ECON011C-n 
5) Which of the following is not correct about quantitative easing? 
A) It is one of the conventional monetary policy tools. 
B) It refers to the Fed's asset purchasing program. 
C) It helped reduce term premium on long-term government bonds. 
D) As a result, the balance sheet of the Fed is much larger than it was 
before the crisis.
6) Bracket creep would be more likely occur in which of the following? 
A) a progressive income tax system 
B) a regressive income tax system 
C) a flat income tax system 
D) none of the above 
7) LTV ratio appears to be positively related to 
A) bond price. 
B) stock price. 
C) housing price. 
D) none of the above 
E) all of the above 
8) Discuss the current debate on the optimal inflation target. 
9) What are the lessons from the crisis for monetary policy? 

Intermediate Macroeconomics 5ECON011C-n 
10) Consider a CB that has an inflation target, 𝜋

. We studied two 
versions of the Phillips curve earlier. The general Phillips curve is: 
− 𝜋
= −𝛼(𝑢
− 𝑢

The first version of the Phillips curve was: 
− 𝜋
= −𝛼(𝑢
− 𝑢

and the second version of the Phillips curve was 
− 𝜋̅ = −𝛼(𝑢
− 𝑢

a. How are the two versions of the Phillips curve different? 
b. In either version, in principle the CB is able to keep the actual rate 
of inflation in period t equal to the target rate of inflation 𝜋

every period. How does the CB carry out this task? 
c. Suppose the expected rate of inflation is anchored (does not 
move) and equal to the target rate of inflation, that is, 𝜋 = 𝜋

How does this situation make the CB’s task easier? 
d. Suppose the expected rate of inflation is last period’s rate of 
inflation rather than the target rate of inflation. How does this 
make the CB’s task more difficult? 
e. Use your answer to parts (c) and (d) to answer the question: Why 
CB credibility about the inflation target so useful? 
f. In part (b), we asserted that the CB could always hit its inflation 
target. Is this likely in practice? 
g. One specific problem faced by the CB is that the natural rate of 
unemployment is not known with certainty. Suppose the natural 
rate of unemployment, 𝑢
, changes frequently. How will these 
changes affect the CB’s ability to hit its inflation target? Explain. 

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