| Question | Explain the costs and benefits of reducing inflation to zero. Which are temporary and which are permanent? |
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| Subject | business-economics |
Order the answer to: Explain the costs and benefits of reducing inflation to zero.
Order the answer to: Give an example of a monetary policy rule. Why might
| Question | Give an example of a monetary policy rule. Why might your rule be better than discretionary policy? Why might it be worse? |
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| Subject | business-economics |
Order the answer to: Explain why monetary and fiscal policy work with a lag.
| Question | Explain why monetary and fiscal policy work with a lag. Why do these lags matter in the choice between active and passive policy? |
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| Subject | business-economics |
Order the answer to: Suppose Federal Reserve policymakers accept the theory of the sh
| Question | Suppose Federal Reserve policymakers accept the theory of the short-run Phillips curve and the natural-rate hypothesis and want to keep unemployment close to its natural rate. Unfortunately, because the natural rate of unemployment can change over time, they aren’t certain about the value of the natural rate. What macroeconomic variables do you think they should look at when conducting monetary policy? |
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| Subject | business-economics |
Order the answer to: As described in the chapter, the Federal Reserve in 2008
| Question | As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. a. Starting from a long-run equilibrium, illustrate the effects of these two changes using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram. On both diagrams, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B. For each of the following variables, state whether it rises or falls, or whether the impact is ambiguous: output, unemployment, the price level, the inflation rate. b. Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keep unemployment and output at their natural rates. What action would it take? On the same set of graphs from part (a), show the results. Label the new equilibrium as point C. c. Why might the Fed choose not to pursue the course of action described in part (b)? |
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| Subject | business-economics |
Order the answer to: Given the unpopularity of inflation, why don’t elected leaders a
| Question | Given the unpopularity of inflation, why don’t elected leaders always support efforts to reduce inflation? Many economists believe that countries can reduce the cost of disinflation by letting their central banks make decisions about monetary policy without interference from politicians. Why might this be so? |
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| Subject | business-economics |
Order the answer to: Suppose the Federal Reserve announced that it would pursue contr
| Question | Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation rate. Would the following conditions make the ensuing recession more or less severe? Explain. a. Wage contracts have short durations. b. There is little confidence in the Fed’s determination to reduce inflation. c. Expectations of inflation adjust quickly to actual inflation. |
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| Subject | business-economics |
Order the answer to: Suppose the Federal Reserve’s policy is to maintain low and
| Question | Suppose the Federal Reserve’s policy is to maintain low and stable inflation by keeping unemployment at its natural rate. However, the Fed believes that the natural rate of unemployment is 4 percent when the actual natural rate is 5 percent. If the Fed based its policy decisions on its belief, what would happen to the economy? How might the Fed come to realize that its belief about the natural rate was mistaken? |
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| Subject | business-economics |
Order the answer to: The inflation rate is 10 percent, and the central bank
| Question | The inflation rate is 10 percent, and the central bank is considering slowing the rate of money growth to reduce inflation to 5 percent. Economist Milton believes that expectations of inflation change quickly in response to new policies, whereas economist James believes that expectations are very sluggish. Which economist is more likely to favor the proposed change in monetary policy? Why? |
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| Subject | business-economics |
Order the answer to: Suppose the economy is in a long-run equilibrium. a. Draw the
| Question | Suppose the economy is in a long-run equilibrium. a. Draw the economy’s short-run and long-run Phillips curves. b. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? c. Now suppose the economy is back in long-run equilibrium, and then the price of imported oil rises. Show the effect of this shock with a new diagram like that in part (a). If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? If the Fed undertakes contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? Explain why this situation differs from that in part (b). |
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| Subject | business-economics |
