­1. The author would most likely agree with all of the following statements EXCEPT:

Explanation

The author would most likely disagree with option D. The passage suggests that, under certain assumptions, expanding the monetary base in a liquidity trap has no direct effects on the economy. This means that, contrary to option D, the liquidity trap does have indirect effects on the economy through changes in expectations. Lucas argues that understanding public expectations about policy is crucial for defining optimal policy, and this understanding is necessary for coherent analysis of current policy, even away from the liquidity trap.

A. The passage discusses the impact of intentionally suppressing policy decisions as part of the transparency literature, so the author would likely agree with this statement.

B. The passage does mention secondary benefits to an open and public fiscal policy, supporting the idea that transparency can have positive effects, so the author would likely agree with this statement.

C. The passage emphasizes that what constitutes optimal policy is linked with public expectations about policy, so the author would likely agree with this statement.

D. The passage suggests that, under certain assumptions, expanding the monetary base in a liquidity trap has no direct effects on the economy. However, the passage acknowledges that any effects result from changes in expectations, indicating that there are indirect effects. Therefore, the author would likely disagree with D.

E. The passage supports the idea that openness is an obligation of a central bank in a free and democratic society, advocating for clear communication of fiscal policies. Therefore, the author would likely agree with E.

Answer: D

2. According to the passage, Faust and Scensson would most likely agree with which of the following statements?

Explanation

A. While the passage does argue in favor of clear communication, it primarily emphasizes the importance of clear communication for public understanding, democratic accountability, and shaping policy expectations. Faust and Svensson's work is mentioned in the context of examples where deliberate surprises by central banks might be beneficial. Therefore, while they might agree with the benefits of clear communication, it's not the focus of their work as discussed in the passage.

B. The passage primarily discusses the relevance of public expectations to monetary policy rather than fiscal policy. While it's true that public expectations are important in economic policy, the passage doesn't specifically mention Faust and Svensson's views on fiscal policy. Therefore, there's no direct support for this statement in relation to their work.

C. The passage mentions the liquidity trap and its relevance to policy expectations. However, it does not suggest that the liquidity trap is invalid in current economic thinking. Instead, it emphasizes the importance of considering policy expectations, especially in scenarios like the liquidity trap. There's no indication that Faust and Svensson would agree that the liquidity trap is invalid.

D. This statement aligns with the discussion in the passage about examples from the transparency literature where deliberate surprises by central banks might be beneficial. Faust and Svensson's work is cited in this context, indicating that they would likely agree that there are circumstances where obscuring central bank activities could be appropriate, contrary to conventional views on transparency.

E. The passage discusses the conventional transparency literature and contrasts it with arguments in favor of clear communication. However, it does not suggest that the conventional transparency literature is no longer valid. Faust and Svensson's work is discussed in relation to examples from this literature, indicating that it's still relevant. Therefore, there's no support for the idea that conventional transparency literature is no longer valid.

Answer: D­

3. The main concern of the passage is to

Difficulty Level: 700

Explanation

The correct answer is (B)

(A) The passage does discuss strategies related to central bank communication, but it does not explicitly advocate for any specific strategies. It presents arguments for and against clear communication but does not promote a particular strategy.

(C) This option is partially correct in that the passage does explain differences in the function of transparency literature, but it goes beyond just explaining differences. The passage also presents arguments for and against clear communication by central banks, making (B) a more accurate representation of its main concern.

(D) The passage primarily deals with the concept of transparency in central banking and the arguments surrounding it, rather than analyzing and explaining a political phenomenon. While it mentions the views of various economists and central bankers, it does not focus on a broader political phenomenon.

(E) The passage does touch upon the effectiveness of clear communication by central banks, but this is not its primary focus. It discusses the arguments for clear communication more than it evaluates their effectiveness in terms of economic policy.

In contrast, (B) accurately captures the main concern of the passage, which is to discuss and argue for a departure from conventional wisdom regarding central bank transparency. The passage highlights that the traditional views on central bank transparency may not be valid in the modern context and presents reasons for this departure from conventional wisdom.

Answer: B

4. In the third paragraph, the author uses a quote by Greenspan to:

Explanation

A. This option suggests that the quote by Greenspan is used to articulate a widely held perspective among economists and commentators. It implies that many people in the field share the belief that openness and transparency are fundamental responsibilities of central banks in a democratic society. The passage indeed supports this idea by stating that "a great many conservative and liberal economists have supported this view."

B. This option implies that the quote provides specific information about a fiscal policy. However, the quote by Greenspan does not pertain to fiscal policy but rather to the conduct and obligations of central banks in terms of transparency and openness.

C. This option suggests that the quote is used to describe the consequences or effects of a particular decision. While Greenspan's statement does touch upon the impact of central bank behavior on society, it primarily emphasizes the principle of openness and transparency rather than detailing the consequences of a specific decision.

D. This option implies that the quote serves to strengthen or support a statement made earlier in the passage. Indeed, the passage discusses the importance of clear communication by central banks, and Greenspan's quote aligns with this broader argument, reinforcing the idea that transparency is essential.

E. This option suggests that the quote provides insight or clarification regarding a particular phenomenon discussed in the passage. However, Greenspan's statement primarily addresses the broader principle of central bank transparency and its importance in a democratic society, rather than explaining a specific phenomenon.

Answer: A­