4. Monetary policy and the Phillips curveThe following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment raand inflation rate. Assume that the economy is currently in long-run equilibrium.Suppose the central bank of the hypothetical economy decides to increase the money supply.On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy.Hint: You may assume that the central bank's move was unanticipated.INFLATION RATE (Percent)0INFLATION RATE (Percent)3NDSR Philips CurveIn the short run, an unexpected increase in the money supply results inunemployment rate.12UNEMPLOYMENT RATE (Parcent)On the following graph, shift the curve or drag the blue point along thesupply.31512UNEMPLOYMENT RATE (Percent)1515In the long run, the increase in the money supply results in(relative to the economy's initial equilibrium).18SR Phillips Curvea decrease?in the inflation rate andin thean increase th, to show the long-run effects of the increase in the moneyno changein the inflation rate andin the unemployment rate

4. Monetary policy and the Phillips curve The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment ra and inflation rate. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to increase the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. ercent) 6 5 SR Philips Curve

4. Monetary policy and the Phillips curve The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment ra and inflation rate. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to increase the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. ercent) 6 5 SR Philips Curve

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Monetary Policy: End of Chapter Problem Milton Friedman and Anna Schwartz argued in their Monetary History of the United States that money growth and velocity usually shift in the same direction. Thus, higher growth causes optimism and slower growth causes pessimism. They believed that velocity had its own shocks as well. a. Let's run through some examples of how this might work, in a setting where the Fed wants to keep AD growth stable at 10%. To keep things simple, we will assume that the Fed can control money growth perfectly. We will also assume that a 1% change in money growth causes a 0.5% shock to velocity growth in the same direction. Using these assumptions, fill in the missing values for the following table. For each case: AD = Initial Velocity Shock + Money Growth + Velocity Shock Caused by Money Growth Round your answer to the nearest hundredth. Year 2 money growth: Year 3 money growth: 254 15 Incorrect 8 incorrect Year 2 3 Initial Velocity Shock 4% 3% 16% 8% 4% 0% Year 2…
Inflation rate Phillips curve, Phillips curveo Unemployment rate In the given graph of the Phillips curve, which of the following would have caused the Phillips curve to shift as shown? Conducting contractionary monetary policy when the economy is at its short-run equilibrium. Conducting expansionary monetary policy when the economy is at its short-run equilibrium. Conducting contractionary monetary policy when the economy is at its long-run equilibrium. 1 Conducting expansionary monetary policy when the economy is at its long-run equilibrium.
The long-run effects of monetary policy The following graphs plot the long-run equilibrium situation for an economy. The first graph plots the aggregate demand (AD) and long-run aggregate supply (LRAS) curves. The second graph plots the long-run and short-run Phillips curves (LRPC and SRPC, respectively). LRAS H AD 3 6 9 12 OUTPUT (Trillions of dollars) PRICE LEVEL 0 15 18 AD 441 LRAS
21.According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by: A)the Organization of Petroleum Exporting Countries (OPEC). B)the U.S. Treasury. C)the Federal Reserve. D)private citizens. 22.According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be: A)increasing. B)decreasing. C)7 percent. D)constant. 23.If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be ______ percent. A)3 B)4 C)9 D)11 24.Percentage change in P is approximately equal to the percentage change in: A)M. B)M minus percentage change in Y. C)M minus percentage change in Y plus percentage change in velocity. D)M minus…
On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the long-run effects of the increase in the money supply. 6 8 10 12 UNEMPLOYMENT RATE (Percent) In the long run, the increase in the money supply results in in the inflation rate and in the unemployment rate (relative to the economy's initial equilibrium). INFLATION RATE (Percent)
1. Inflation can cause increased wealth inequality through the Cantillion Effect. Essentially, this means that expansionary monetary policy benefits those who are initially given new money (usually those who are rich and well-connected), while the rest of the population suffers the effects of inflation. Using the quantity theory of money, explain why this is the case.case. 2. Assume that the economy has an annual inflation rate of 5 percent. Are the following investments profitable in real terms? You do not need to explain your answert. (a) The spot price of silver is $31 per ounce. You purchase 50 ounces of silver for $1,600, in order to compensate the merchant. Over the year, the spot price of silver rises to $34 per ounce, and you are able to sell the silver you have at the spot price. (b) You purchase a Non-Fungible Token (NFT) for $98 million. The following year, you are able to sell it for $102.5 million 3. Why does the 'inflation tax' transfer resources from working people to…
Using the Quantity Theory of Money, derive an expression for the rate of inflation for the case when the velocity of money is not a constant and use it to explain the pre-1990 and post-1990 curves on slide 32 of lecture 16.
Monetary policy and the Phillips curve The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment rate and inflation rate. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to decrease the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. In the short run, an unexpected decrease in the money supply results in (increase, decrease, no change) in the inflation rate and (increase, decrease, no change) in the unemployment rate.
Solve this economic If the Fed is able to permanently reduce the inflation rate, households will eventually lower their expectation of the inflation rate. Once that happens, the Phillips curve will shift ________, and the Fed can return output to potential GDP by ________ the real interest rate.Select one: a)up; lowering b) up; raising c) down; raising d) down; lowering
28. The Monetary Policy Rule and the Velocity of Money The quantity equation shows that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and real GDP (Y): M × V = P × Y. Monetarists argued that the central bank should follow a monetary policy rule to ensure that the money supply (M) grows at a certain rate over time. They argued that the inflation rate was slow to change and predictable, so constant growth of the money supply would translate into steady growth of nominal GDP (P x Y). To see why this could be the case, consider the fact that any time the left-hand side of the quantity equation, M × V, changes by a certain percentage, the right-hand side, P x Y, must change by the same percentage: Percentage Change in (M x V) Percentage Change in (P x Y) You can use a general rule about percentage changes to analyze changes in the variables of the quantity equation even further. The percentage change in the product of two…
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Inflation – Work It Out: Question 2 Consider an economy with the money demand function is = Round answers to two places after the decimal when necessary. d. Suppose the announcement of a new head of the central bank, with a reputation as a tough inflation fighter, reduces expected inflation by 1.5 percentage points. According to the Fisher effect, what is the new nominal interest rate? New nominal interest rate: e. Calculate the new velocity of money. New velocity of money: E|