Monetary Policy: End of Chapter Problem 28a Central bankers must manage expectations. Suppose that inflation is running at 10% and the central banker would like to lower inflation to 2% without reducing real growth. What should the central banker tell the public? And at what level should the central banker set money growth? Adjust the graph to show how the central banker's policy will affect the economy, assuming people believe the central bank will do as it says. Label the new equilibrium with point b. Assume that velocity shocks are zero and that the potential growth rate is 3%. b. Suppose that the public does believe the central banker. What temptation might the central banker face? Label the equilibrium at which the economy will wind up if the central banker succumbs to this temptation with point c. c. If the central banker is not believed but follows the policy in part a, use point d to indicate where the economy will be. Use your answer to parts b and c to discuss the importance of independent central banks. The central banker should say the inflation goal is %. Money growth should be set at %.

Monetary Policy: End of Chapter Problem 28a Central bankers must manage expectations. Suppose that inflation is running at 10% and the central banker would like to lower inflation to 2% without reducing real growth. What should the central banker tell the public? And at what level should the central banker set money growth? Adjust the graph to show how the central banker's policy will affect the economy, assuming people believe the central bank will do as it says. Label the new equilibrium with point b. Assume that velocity shocks are zero and that the potential growth rate is 3%. b. Suppose that the public does believe the central banker. What temptation might the central banker face? Label the equilibrium at which the economy will wind up if the central banker succumbs to this temptation with point c. c. If the central banker is not believed but follows the policy in part a, use point d to indicate where the economy will be. Use your answer to parts b and c to discuss the importance of independent central banks. The central banker should say the inflation goal is %. Money growth should be set at %.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter32: Macroeconomic Policy Around The World

Section: Chapter Questions

Problem 9SCQ: Show, using the AD/AS model, how governments can use monetary policy to decrease the price level.

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Question

Monetary Policy: End of Chapter Problem 28a
Central bankers must manage expectations. Suppose that inflation is running at 10% and the central banker would like to
lower inflation to 2% without reducing real growth. What should the central banker tell the public? And at what level should
the central banker set money growth? Adjust the graph to show how the central banker's policy will affect the economy,
assuming people believe the central bank will do as it says. Label the new equilibrium with point b. Assume that velocity
shocks are zero and that the potential growth rate is 3%.
b. Suppose that the public does believe the central banker. What temptation might the central banker face? Label the
equilibrium at which the economy will wind up if the central banker succumbs to this temptation with point c.
c. If the central banker is not believed but follows the policy in part a, use point d to indicate where the economy will be. Use
your answer to parts b and c to discuss the importance of independent central banks.
The central banker should say the inflation goal is
%.
Money growth should be set at
%.

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