Question Details

The implication of this for monetary policy is that 



“And this is also a good time to engage in some serious infrastructure spending, which the U.S. badly needs in any case. The usual argument against public works as economic stimulus is that by the time you get around to repairing the bridges ……” This clip was written in October of 2008, when the world was dealing with the big 2008 financial crisis. The next two questions relate to this clip. 

1. This clip is best completed with 
a)	you have run out of money 
b)	inflation has taken hold 
c)	the stimulus is no longer needed 
d)	the recession is even worse 

2. In this context why would the usual argument not be convincing? 
a)	we are clearly headed for a major, long-lasting recession 
b)	the Fed will clearly be increasing the money supply by huge amounts 
c)	the interest rate is bound to drop to make financing easy 
d)	inflation is not in the picture 

3. “The empirical relationship between money growth and variables such as inflation and nominal output growth has continued to be unstable,’ Mr. Bernanke said.” The implication of this for monetary policy is that 
a)	a rule based on a monetary aggregate is no longer advisable 
b)	monetary policy is without strength 
c)	monetary policy should be abandoned in favor of fiscal policy 
d)	rules for monetary policy are not advisable 

4. “A single cigarette now costs Z$500,000. Mugabe blames hyperinflation on exploitative businessmen who are part of a Western plot to destabilize his country. His critics point instead to widespread economic mismanagement, corruption, and the government- policy of ….” The best way to complete this statement is 
	a) subsidizing food b) high interest rates c) printing money d) government deficits 

5. ”The Fed blames all problems on external influences beyond its control and takes credit for any and all favorable occurrences. It thereby continues to promote the myth that the private economy is unstable, while its behavior continues to document the reality that government is today the major source of economic instability.” What view of economic policy does this clip promote? 
a)	a monetary rule 
b)	use fiscal policy, not monetary policy 
c)	the use of discretionary monetary policy 
d)	fix the interest rate 
	
6. ”While central bankers still accept that inflation is largely a result of money-supply growth, few target the money supply in practice because …….” The best way to complete this statement is 60 
a.	money growth is too difficult to measure 
b)	velocity is unstable 
c)	money growth is not fully under the control of the Fed 
d)	all of the above 

7. “It took Paul Volker, who became Fed chairman in 1979, to put the monetarist theory into practice, adopting money-supply targets that drove interest rates to double-digit levels, sent the economy into a deep recession, and ultimately brought inflation down.” What is this monetarist theory ? 
a)	inflation is always and everywhere a monetary phenomenon 
b)	the main determinant of the inflation rate is the rate of growth of the money supply 
c)	inflation can be controlled by controlling money growth 
d)	all of the above 



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