Principles of Economics (MindTap Course List)
8th Edition
ISBN: 9781305585126
Author: N. Gregory Mankiw
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 35, Problem 4PA
Subpart (a):
To determine
Economy’s short-run and long-run Phillips curves.
Subpart (b):
To determine
Economy’s short-run and long-run Phillips curves.
Subpart (c):
To determine
Economy’s short-run and long-run Phillips curves.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
If the economy has rational expectations and the model is sticky price model. Could you explain why the following statement true in macroeconomics?
Consider an economy that is initially in its long-run equilibrium. Suppose this economy suffers a temporary negative supply shock. If the central bank’s sole objective is to stabilize output in the short-run, then what will happen after the central bank has responded according to its objective?
A.
Inflation will be lower, output will back at its original level
B.
Inflation will be lower, output will be lower
C.
Inflation will be higher, output will be higher
D.
Inflation will be lower, output will be higher
E.
Inflation will be higher, output will be lower
F.
Inflation will be higher, output will back at its original level
a. According to the Misperceptions theory, what would be the effect of an unanticipated monetary expansion shock on real interest rate (r), real output (Y), and price level (P) in the short and in the long-run? Why? Explain with details.b. Does your answer change if the shock is expected/anticipated? Why? Show how.
Chapter 35 Solutions
Principles of Economics (MindTap Course List)
Knowledge Booster
Similar questions
- Some commentators have argued that the Fed is running a risk with inflation in the future as a result of the recent large-scale asset purchase programs (known as QE). Although inflationary risks in the near term look still remote, their concerns with its potential negative effects on the economy may not be totally groundless. Which of the following may not justify their concerns? a. Ultra loose monetary policy as it has been may eventually lead to higher inflation.b. Lower interest rate may cause a large depreciation of the US dollar, and hence raise import prices and inflation.c. Lower interest rate may lead to asset-price bubble, raising the risk of a major eventual correction and its potential adverse effects on the economy.d. Lower interest rate may raise productivity growth that would eventually spark inflationarrow_forwardSuppose government spending increase. Would the effect on aggregate demand be larger if the Federal Reserve held the money supply constant in response or if the Fed were committed to maintaining a fixed interest rate? Explain. 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? 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…arrow_forwardFor this question, assume that the Fed sets monetary policy according to the Taylor rule. Suppose current U.S. macroeconomic conditions are represented by the following: π < π?* and u > un. Given this information, we would expect that the Fed will: A.implement a monetary contraction. B.more information is need to answer this question. C.maintain its current stance of monetary policy. D.implement a monetary expansion. Which of the following would cause an increase in M1? A.a reduction in the required ratio of reserves to deposits B.an increase in the discount rate C.an open market operation where the Fed buys bonds D.thes all of these E.none of thesearrow_forward
- In the Friedman-Lucas money surprise model, there is a negative money demand shock. Neither private sector economic agents nor the central bank can observe the shock directly. Assume that the central bank is committed to money growth targeting. 1. How will it affect the labour, goods and money markets? Show graphically. 2. Argue that the shock could result in inefficient outcomes. Explain using diagrams.arrow_forwardSuppose a central bank targets an inflation rate of 3%. She projects a long-termeconomic growth rate of 4%.a. Using the Classical Theories, suggest an appropriate long-term monetary policy.State the necessary assumptions. b. Suppose the new Chairman of the central bank will assume his duty next year.He is widely expected to be a “monetary hawk” – he favors a “tighter” growth inmoney supply.Other things being constant, how would this affect the expected inflation rate,nominal interest rate and the current general price level? Using relevant ClassicalTheories, briefly explain your answers.arrow_forwardIn the monetary intertemporal model, assume that money supply is always fixed. Suppose that there is an increase in real wage. How does this change affect interest rates (both real and nominal), price level, employment, total factor productivity and equilibrium output? Carefully explain your answers. b) Suppose that, in a liquidity trap, bank reserves are less liquid than government debt. If the Central Bank conducts an open market purchase of government debt, what is the effect on price level? Use an appropriate set of diagram to explain your answer.arrow_forward
- 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 LRASarrow_forwardIf firms and workers have adaptive expectations, what impact will contractionary monetary policy have on inflation, unemployment, and the Phillips curve? If expectations are adaptive, how will the economy adjust to a new, long-run equilibrium in response to contractionary monetary policy?arrow_forwardSuppose that a new Central Bank’ chair is appointed and his/her approach to monetary policy is that he/she only cares about increasing employment since the inflation rate is remain low and stable. He/she wants to prioritize more on using accommodative monetary policy to promote employment. How would you expect the monetary policy curve to be affected, if at all?arrow_forward
- The following graph plots a short-run Phillips curve for a hypothetical economy. Show the short-run effect of a contractionary monetary policy by dragging the point along the short-run Phillips curve (SRPC) or shifting the curve to the appropriate position. Now, show the long-run effect of a contractionary monetary policy by dragging either the short-run Phillips curve (SRPC), the long-run Phillips curve (LRPC), or both. As anticipated, inflation (rises/falls) and the short-run Phillips curve shifts (downward/upward) , highlighting the cost of fighting inflation, which is (higher unemployment in the long run/temporary unemployment/lower unemployment) . Which of the following examples represents a cost of inflation? Check all that apply. -An unintended redistribution of wealth from borrowers to lenders -A general decrease in purchasing power -Increased variability of relative prices -A coffee shop’s costs to reprint its menu to reflect fluctuating pricesarrow_forwardA. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?" B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages? C. Provide an example of the book's short-run model being based on "microfoundations."arrow_forwardThe long-run effects of monetary policyarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Macroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506756Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Macroeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning