9) Two neighboring countries - Tweedledee and Tweedledum - are experiencing high inflation,and they have different monetary and fiscal policy responses.a) Tweedledee's government is increasing government spending, while Tweedledums's CentralBank is increasing the federal funds rate. Explain which of the two policies may help steminflation.b) How will Fiscal policy affect the labor market in Tweedledee if wages are downwardlyrigid? Explain with a diagram.c) What do you expect will happen to the unemployment rate in Tweedledum given theirmonetary policy if wages are downwardly rigid? Explain with a diagram.d) What will be the impact on the labor market and inflation if the Tweedledum governmentincreases spending there as well?e) Of these groups in Tweedledee, which would be happy or sad with the government policy?1) ex-government employees who are retired and receive a pension, 2) students who havetaken out loans for college from the government, 3) bank owners in Tweedledee. Why?

a) Tweedledee and Tweedledum are two countries that are located in close proximity to one another…

Answered: 9) Two neighboring countries -…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter27: Issues In Macroeconomic Theory And Policy

Section: Chapter Questions

Problem 1P

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What is the result of the politicians who are consistently reluctant to enact policies to fight inflation? a) higher and higher government debt b) low interest rates c) falling deficits d) a decrease in the money supply What is the result of the politicians who are consistently reluctant to enact policies to fight inflation? a) higher and higher government debt b) low interest rates c) falling deficits d) a decrease in the money supply
Country Y is experiencing severe and unanticipated inflation. Identify one fiscal policy action that could be implemented to reduce inflation. Identify an open-market operation that could be implemented to reduce inflation.
You have been tasked with advising the dictator of a nation over what he should do to increase the countries GDP. He suggests printing money and increasing the growth rate of the money supply. He wants to give this newly printed currency to his soldiers and best political supporters. You know this will not increase GDP in the long run because... I. Money is neutral II. Increasing the growth of the money supply only causes inflation in the long run III. He would only increase GDP in the long run if he distributed the money equally to all citizens IV. He would only increase GDP in the long run only if he printed a large enough sum of money I, II, and III only I, II, III, and IV III only I and II only
Explain what kind of monetary policy and fiscal policy tools can be used to fight against inflation
Which of the following is an effective fiscal tool to control inflation in boom times?a) Reducing government spendingb) Increasing government spendingc) Decreasing taxationd) Increasing money supply
A2) Economics When there's a large and ongoing budget deficit, under which scenario is inflation most likely to increase? Group of answer choices A)the central bank purchases a large portion of the government bonds B)most purchases of government bonds are by members of the nation C)global investors purchase a large portion of government bonds D)when there's crowding out as a result of the large budget deficit
The Federal Reserve, the central bank of the United States, has an inflation target of 0.3% per month. According to the Quantity Theory of Money, by how much must the Federal Reserve grow the money stock in order to hit its inflation target? The Federal Reserve must decrease the money stock by 0.3% per year. The Federal Reserve must increase the money sock by 0.3% per year. The Federal Reserve must decrease the money stock by 0.3% per month. The Federal Reserve must increase the money stock by 0.3% per month.
Which of the following is a policy tool used to combat demand-pull inflation? a) Contractionary fiscal policy b) Expansionary monetary policy
An unexpected increase in the money supply increases ".........." in the short run and redistributes wealth "........" in the long run? employment; from creditors to debtors employment; from debtors to creditors unemployment; from creditors to debtors unemployment; from debtors to creditors
Some economists argue that suddenly reducing money supply growth is a costly way to reduce inflation and that it may not work. For example, if a government cuts money growth but makes no real fiscal reforms, people will expect the government will eventually need to expand the money supply to pay for its expenditures. Thus, the promise to fight inflation will not be credible. Explain why credibility is important to a reduction in the inflation rate.
e. Show the impact of the fiscal policy action on a correctly labeled money market graph (remember that the government will need to use money to make more transactions). i. ii. Label the original nominal interest rate i₁ and the new nominal interest rate i2.4 DESCRIBE the change. f. Suppose (in a limited reserves framework) the Federal Reserve decides to implement monetary policy to counteract inflation that occurred following the spending increase. i. What open market operation would they need to implement? ii. iii. How would the policy action impact the money supply?. What change in the discount rate would they use if they wanted it to be consistent with the open market operation? g. Assuming a limited reserves framework, graph the impact of the monetary policy action on the money market graph in part e. i. ii. Label the new interest rate i3. E DESCRIBE the combined impact of parts e and g (the fiscal and monetary policy) on nominal interest rates.
Why does the “quality/new goods bias” arise if we calculate the inflation rate based on a fixed basket of goods?

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