1. produce serious recessions in which output falls and unemployment rises.
2. lead to deflation, which, in turn, can help trigger financial crises.
3. lead to inflation, which decreases the efficiency of the economy.
4. do all of the above.
5. do only (a) and (b) of the above.

1. can help promote price stability.
2. is a necessary element in successful monetary policy strategies.
3. forces a nation's monetary authority to keep the price level from growing or falling too fast.
4. can do all of the above.
5. can do only (a) and (b) of the above.

7. If the central bank pursues a monetary policy that is more expansionary than what firms and people expect, then the central bank must be trying to

1. boost output in the short run.
2. constrain output in the short run.
3. constrain prices.
4. boost prices in the short run.

17. Advantages of exchange-rate targeting include:

1. The nominal anchor of an exchange-rate target directly contributes to keeping inflation under control by tying the inflation rate for internationally traded goods to that found in the anchor country.
2. An exchange-rate target provides an automatic rule for the conduct of monetary policy that helps mitigate the time-inconsistency problem.
3. An exchange-rate target has the advantage of simplicity and clarity, as it is easily understood by the public.
4. All of the above.
5. Only (a) and (b) of the above.

1. An exchange-rate target has the disadvantage of leaving the country less open to a speculative attack on its currency.
2. Shocks that change interest rates in the anchor country lead to corresponding changes in interest rates in the target country.
3. Since an exchange-rate target requires the central bank to tighten monetary policy when there is a tendency for the domestic currency to appreciate or to loosen policy when there is a tendency for the domestic currency to depreciate, the time-inconsistency problem is more likely to occur.
4. All of the above are disadvantages.
5. Only (a) and (b) of the above are disadvantages.

30. Disadvantages of exchange-rate targeting include:

1. The anchor country can not pursue an independent monetary policy.
2. The targeting country is open to speculative attack on its currency whenever the anchor country pursues tight monetary policy.
3. The targeting country is open to speculative attack on its currency whenever the anchor country pursues expansionary monetary policy.
4. Both (a) and (b) of the above.
5. Both (a) and (c) of the above.

35) Emerging market countries are in effect between a rock and a hard place because

1. they would be wise to adopt the monetary policy of the United States by pegging their currencies to the dollar, but this policy leaves them open to speculative attacks.
2. to avoid speculative attacks on their currencies they must peg their exchange rates to an anchor country, but this means giving central bankers in these countries too much discretion.
3. to avoid speculative attacks on their currencies they must peg their exchange rates to an anchor country, but this means giving central bankers in these countries too little discretion.
4. by adopting the monetary policy of the anchor country though an exchange rate peg, these countries allow for too little monetary expansion and thereby sacrifice economic growth for price stability.

40) A currency board

1. is a variant of the fixed-exchange target in which the commitment is to the fixed exchange rate is especially strong because the conduct of monetary policy is taken completely out of the hands of the central bank.
2. has the advantage the money supply can expand only when dollars (the anchor currency) are exchanged for domestic currency.
3. may be effective in bringing down inflation quickly and in decreasing the likelihood of a successful speculative attack against the currency.
4. is all of the above.
5. is only (a) and (b) of the above.

45) Disadvantages of dollarization include

1. elimination of the seignorage revenue the government captures from issuing currency.
2. losing the central bank as a lender of last resort.
3. elimination of the possibility of a speculative attack on the domestic currency.
4. all of the above.
5. only (a) and (b) of the above.

50) The lessons to be learned from the text’s discussion of German and Swiss monetary targeting

1. inflation; monetary
2. inflation; exchange-rate
3. exchange-rate; monetary
4. exchange-rate; exchange-rate

Answer: B

60) If the relationship between the monetary aggregate and the goal variable is weak, then

1. monetary aggregate targeting is superior to exchange-rate targeting.
2. monetary aggregate targeting will not work.
3. monetary aggregate targeting is inferior to inflation targeting.
4. both (a) and (c) of the above are true.
5. both (b) and (c) of the above are true.

Answer: E

65) Inflation targeting has the advantage that

1. it is easily understood by the public and is thus highly transparent.
2. it has the potential to reduce political pressures on the central bank to pursue inflationary monetary policy and thereby reduce the likelihood of time-inconsistent policymaking.
3. it is not readily understood by the public, giving central bankers the freedom to pursue discretionary policy with a great deal of freedom.
4. does both (a) and (b) of the above
5. does both (b) and (c) of the above.

Answer: D

1. monetary; rise
2. monetary; decrease
3. nominal GDP; rise
4. nominal GDP; decrease