Question

2. Activist rules are monetary policy rules

1. that change with the business cycle.

2. are rules that adjust with deviations from potential GDP, but not inflation.

3. are rules that adjust when inflation deviates from target, but do not respond to deviations from GDP.

4. that do not adjust with the business cycle changes.

3. Over long periods of time,

A. there is a positive, linear relationship between the rate of money growth and inflation.

B. there is no predictable relationship between the rate of money growth and inflation.

C. there is a stable relationship between the rate of GDP growth and inflation.

D. money growth leads to growth in GDP.
E. GDP growth leads to inflation.

4. All else constant, a decline in the nominal interest rate A. leads to an increase in consumption and investment.
B. leads to a decrease in consumption and investment.
C. leads to an increase in consumption and decrease in investment. D. leads to a decrease in consumption and an increase in investment.

Answer 1

2) that change with the business cycle. This is because these are actively devised from the changes occurring in the business cycles. Monetary policy has active rules when money supply is influenced by the recessions and expansions of business cycles

3)  there is a positive, linear relationship between the rate of money growth and inflation. This is because in the long run real GDP is unaffected by he monetary policy changes. However, price level or inflation rate exhibit a similar trend implying that the relationship is positive or direct

4) leads to an increase in consumption and investment. When there is a decline in rate of interest, saving falls and investment rises. This indicates that consumption should increase.