Chapter 13: A State-Centered Approach to Monetary and Exchange-Rate Policies

Multiple Choice Questions

1. The natural rate of unemployment is the rate of unemployment a) to which an economy will return after a recession or a boom. b)which is determined by the country’s minimum wage. c)which could be zero. d)which cannot be raised by labor market institutions. e)which is determined by the rate of inflation.

Answer: a

2.The accelerationist principle stipulates that a government determined to use monetary policy to keep a)employment below the natural rate for any lengthy period will have to continually increase the rate of inflation to do so. b)unemployment below the natural rate for any lengthy period will have to continually increase the rate of inflation to do so. c)unemployment below the natural rate for a short period will have to continually increase the rate of inflation to do so. d)unemployment below the natural rate for any short period will have to continually decrease the rate of inflation to do so. e)unemployment above the natural rate for any lengthy period will have to continually increase the rate of inflation to do so.

Answer: b

3.During the period 1984-1994 in the United States, the rate of inflation was, on average, about

Answer: e

4. According to Oatley, a)lower inflation during the 1970s did not reduce unemployment relative to the 1960s. b)higher inflation in the 1980s did not raise unemployment relative to the 1970s. c)higher inflation in the 1990s did not raise unemployment relative to the 1980s. d)lower inflation in the 1990s did not raise unemployment relative to the 1980s. e) higher inflation in the 1990s did raise unemployment relative to the 1980s.

Answer: d

5.According to the data presented in the Oatley book, during the period 1964-1990 a)countries with relatively low inflation rates have experienced no economic growth. b)countries with relatively low inflation rates have experienced lower economic growth. c)countries with relatively high inflation rates have experienced higher economic growth. d)if we exclude Germany, the negative relationship between inflation and economic growth disappears. e)if we exclude Japan, the negative relationship between inflation and economic growth disappears.

Answer: e

6.According to Figure 13.1, for 1964-1970 for the six countries listed, if we add the inflation rate to the unemployment rate (lowest is best), the country with the lowest score is a)the United States. b)Italy c)France. d)Britain. e)Japan.

Answer: b

7.According to the data presented in the Oatley book, there is a)no evidence that countries with higher inflation experienced stronger economic growth or lower unemployment. b)some evidence that countries with higher inflation experienced stronger economic growth or lower unemployment. c)no evidence that countries with higher inflation experienced weaker economic growth or lower unemployment. d)no evidence that countries with lower inflation experienced weaker economic growth or higher unemployment. e)some evidence that countries with lower inflation experienced weaker economic growth or higher unemployment.

Answer: a

8. The price stability strategy during the 1980s a) was a reaffirmation of Keynesian principles. b) asserts that the only proper objective of monetary policy was to achieve and maintain a very low and stable rate of inflation. c) asserts that the only proper objective of monetary policy was to achieve and maintain a very high but stable rate of inflation. d) asserts that the only proper objective of monetary policy was to achieve and maintain a very low even if unstable rate of inflation. e) occurred first in Switzerland.

Answer: b

9. The shift from Keynesian strategies to the pursuit of price stability occurred first in a) the United States. b) Germany. c) Britain. d) France. e) Japan.

Answer: c

10. A time-consistency problem arises when a) the best course of action at a particular moment in time differs from the best course of action in general. b) the best course of action at the beginning is usually the best course of action in general. c) the best course of action at the end is usually the best course of action in general. d) there is no way of knowing what the best course of action is in general. e) the best course of action at a particular moment in time is the same as the best course of action in general.

Answer: a

11. According to Oatley, a) neither inflation or unemployment will be higher than it would be if the government could make a credible commitment to low inflation. b) either inflation or unemployment will be higher than it would be if the government could make a credible commitment to low inflation. c) unemployment will be lower than it would be if the government could make a credible commitment to low inflation. d) inflation will be higher than it would be if the government could make a credible commitment to low unemployment. e)e ither inflation or unemployment will be lower than it would be if the government could make a credible commitment to low inflation.

Answer: b

12.According to Oatley, a factor that reduces the inconsistency between democracy and independent central banks is that a)legislatures cannot withdraw the independence of central banks. b)central bankers are typically appointed by elected officials for limited terms of office. c)they are not the only political institutions that are granted independence from electoral politics in democracies. d)monetary policy is a rather minor policy instrument at a government’s disposal. e)the economic benefit is overwhelming more important than the political inconvenience.

Answer: b a)The central bank can set monetary policy free from the interference by the government. b)The central bank is free to decide what economic objective to pursue. c)The central bank is free to decide how to set monetary policy in pursuit of the objective. d)Central bank decisions can be reversed by other branches of the government. e)Central bank decisions cannot be reversed by other branches of the government.

13.Which of the following statements is not a function of central bank independence?

Answer: d

14.According to Oatley, a good example of a highly independent central bank (1969-1995) is a)the Reserve Bank of Australia. b)the Bank of France. c)the Swiss National Bank. d)the Bank of Japan. e)the Bank of Britain.

Answer: c

15.According to Oatley, granting the central bank independence should lead to a)lower inflation than governments have. b)lower unemployment than governments have. c)unstable political consequences. d)higher economic growth than governments have. e)higher unemployment than governments have.

Answer: a

16.According to Oatley’s data in chapter 13, which plots data for 1969-1995, the country with the lowest inflation rate and the most central bank independence was a)Japan. b)Germany. c)Britain. d)France. e)United States.

Answer: b a)1999. b)1985. c)2001. d)1997. e)2002.

17. The EU’s central bank, the ECB, was established in and is one of the world’s most independent central banks.

Answer: a

18.According to the IMF, the global economy shrank by ________in 2020, a)1.9 percent. b) 3.1 percent. c) 3.5 percent. d) 2.9 percent. e) 3.9 percent.

Answer: b a)There is overwhelming evidence that countries with more independent central banks have experienced lower rates of inflation. b)There is no evidence that countries with more independent central banks have experienced lower rates of economic growth. c)There is no evidence that countries with more independent central banks have experienced lower rates unemployment. d)There is strong evidence that independent central banks have been better able to deliver low inflation than governments have. e)There is strong evidence that governments have been better able to deliver low inflation than independent central banks have.

19.According to the data in the Oatley book, which of the following statement is true?

Answer: d a)9 percent of GDP. b)11 percent of GDP. c) 10 percent of GDP. d)8.5 percent of GDP. e)12 percent of GDP.

20. In spring 2020, for instance, the US passed The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) for income replacement programs. The CARES Act was the largest stimulus bill in American history, amounting to 10 percent of GDP.

Answer: c

21.By 2021, the world economy had resumed growth and unemployment had stabilized, but was beginning to experience an uptick in inflation. In the US, prices rose by more than a)10 percent in 2021. b)9percent in 2021. c)8percent in 2021. d)7 percent in 2021. e)6 percent in 2021.

Answer: d a)$3.1 trillion and $2.8 trillion in 2020 and 2021 b)$3.2 trillion and $2.9 trillion in 2020 and 2021. c)$3.3 trillion and $2.6 trillion in 2020 and 2021. d)$3.4 trillion and $2.7 trillion in 2020 and 2021. e)$3.5 trillion and $2.5 trillion in 2020 and 2021.

22.In the US, government debt rose by, _________, the largest increase since World War II.

Answer: a

23.Although the Treasury takes the lead in U.S. exchange-rate policy, it has consistently a)sought cooperation with the Federal Reserve. b) remained independent with the Federal Reserve. c) been dependent on the Federal Reserve. d) been consistent by the European Central Bank. e)sought cooperation with the Federal Trade Commission.

Answer: a

24.The sectoral model leads us to expect firms in the traded-goods industries to pressure the government for some form of exchange-rate arrangement a)because they benefit from a unstable currency. b)because they benefit from an independent ECB. c)because they benefit from a weak ECB. d)because they benefit from a strong currency. e)because they benefit from a weak currency.

Answer: e

25.The two principal criticisms of the state-centered approach to monetary politics are a)it is more prescriptive than explanatory and it does not answer what incentives for currency strength exist for the people who run independent central banks. b)it is more explanatory than prescriptive and it does not answer what incentives for price stability exist for the people who run independent central banks. c)it is more prescriptive than explanatory and it does not answer what biases against labor exist for the people who run independent central banks. d)it is more prescriptive than explanatory and it does not answer what incentives for price stability exist for the people who run independent central banks. e)it is more prescriptive than explanatory and it does not answer what biases for capital savers exist for the people who run independent central banks.

Answer: d

True-False Questions

1. Contemporary economic theory asserts that no Keynesian stable trade-off between inflation and unemployment exists.

Answer: True

2. Contemporary economic theory argues that a government cannot use monetary policy to move unemployment below or above the natural rate of unemployment for more than a short time.

Answer: True

3. Governments can easily make credible commitments to low inflation if they want to because of the time-consistency paradox.

Answer: False

4. A government determined to use monetary policy to keep unemployment below the natural rate for any lengthy period will have to continually increase the rate of inflation to do so. (This is called the accelerationist principle.)

Answer: True

5.Although independent central banks appear to reduce inflation, there is no evidence that they may also be associated with lower growth and higher unemployment.

Answer: False

6. By the middle of 2020, the US economy had shrunk by nine percent compared to one year earlier and unemployment had reached almost 15 percent.

Answer: True

7. According to the IMF, “At the onset of the pandemic, policymakers around the world were synchronized in dramatically easing monetary policy and expanding fiscal policy.”

Answer: True

8.Since national governments have relinquished control over monetary policy to independent central banks, they have not retained control over exchange-rate policy.

Answer: False

9.Conflicts are not likely to arise when the central bank wants the exchange rate to move in one direction in order to maintain price stability, but the government wants the exchange rate to move in the other direction to satisfy demands made by important interest groups.

Answer: False

10.Little attention has been devoted to the question of whether the people who run the independent central bank actually have an incentive to give priority to price stability.

Answer: True

Essay/Discussion Questions

1. Explain and discuss how the Keynesian policy revolution came to an end as a result of prolonged inflation in the 1970s and 1980s.

2. Discuss the logic and the evidence that all countries do, in fact, have a natural rate of unemployment. How long is it reasonable to wait after a recession or a boom for this long-run equilibrium to appear?

3. Explain the dynamic and concept of the accelerationist principle in the context of the United States between 1961 and 1999. How unique was the American experience?

4.How strong is the negative relationship between inflation and unemployment? Give some examples to justify your claim.

5.What is meant by the time-consistency problem and how does it affect a government’s commitment to low inflation?

6.Explain how and why during the pandemic governments across the advanced economies eased fiscal and monetary policy to cushion the initial shock and promote recovery.

7.Are independent central banks compatible with democratic principles?

8.Discuss whether and why the behavior of equally independent central banks can substantially differ in both behavior and policy.

9.Discuss and predict why future politics of monetary and exchange rate policies between elected officials and central banks will be more or less conflictual.

10.Describe and analyze the state-centered approach to monetary and exchange-rate politics.