Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 35, Problem 5PA
To determine
The response of inflation to new policies.
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Monetary policy set with discretion is said to feature an inflation bias because commitment to a rule could achieve lower inflation at no cost in terms of higher unemployment. True or False? Explain.
If the economy has rational expectations and the model is sticky price model. Could you explain why the following statement true in macroeconomics?
The "rational expectations" school of economists, including Robert Lucas and Thomas Sargent, argue that changes in monetary policy cannot affect unemployment rates in the short run or long run.
True
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Chapter 35 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- Does the effectiveness of monetary policy depend on inflationexpectations? Explainarrow_forwardIn the simple monetary policy rule considered in Chapter 13, what role does the parameter m_bar (letter “m” with a short bar above it) play? It stands for the rate of inflation It tells us how unemployment changes when output changes It governs how aggressively monetary policy responds to inflation None of the above (i.e., something else)arrow_forwardThe most common definition that monetary policymakers use for price stability is Question 15 options: a) low and stable deflation. b) an inflation rate of zero percent. c) low and stable inflation. d) high and stable inflation.arrow_forward
- What Can the Fed Do about Inflation? In the article by Thomas Hogan, we learn that Russia's invasion of the Ukraine nor the shortage or supply chain issues has not derived the main causes of inflation. (Hogan, 2022) The main cause for the issues that we have been facing come directly from the constant price changes and the monetary policy that is currently in place. We learn that with Federal Open Market Committee (FOMC) has not adjusted their monetary policy, and have been raising the rates in such small increments that is causing the inflation to continue in an upward trend. What needs to occur is the FOMC needs to raise interest rates in greater scales in order the combat the inflation that is taking place and stabilize the price levels that are out there. (Hogan, 2022) What needs occur is that the Fed needs to come up with a policy that will allow for a predetermined path that slows down and regulating the money growth back to a safe place. Having the guidance from the article…arrow_forwardAccording to rational expectations economists, as a result of an increase in aggregate demand due to an expansionary monetary policy, real output and employment would not increase because said policy would be offset by higher prices and Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardWhich describes the difference between the Taylor rule and inflation targeting? A) The Taylor rule responds to past inflation, and inflation targeting is based on a forecast of inflation. B) The Federal Reserve uses inflation targeting, and the Bank of England uses the Taylor rule. C) Inflation targeting responds to past inflation, and the Taylor rule is based on a forecast of inflation. D) Inflation targeting is a strategy used in conducting fiscal policy, while the Taylor rule is used in monetary policy.arrow_forward
- Suppose Bangladesh Bank (BB) decided to follow the Taylor rule to conduct monetary policy. BB's target interest rate is the lending rate. The economists in BB understands that there will be some time lag for their policy to be effective and therefore they use a forecasted or expected inflation rate (instead of current inflation rate) in their policy rule. BB is equally concerned about output and inflation. According to BB's estimate the equilibrium real lending rate is 5 percent. BB's inflation target is 3 percent and the deviation of actual output from the potential output (as measured by the HP filter) is 1 percent.a. If the expected inflation rate is 6%, then at what target should the lending rate be set according to the Taylor rule?arrow_forwardGiven an inflationary gap, the Federal Reserve will use monetary policy to _________ real GDP and the interest rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decreasearrow_forwardBoblandia produces no oil. It starts at potential GDP with inflation equal to the Central Bank's inflation target. Boblandia then sees a significant increase in the price of oil. Which of the following is true (according to our models) if the Central Bank engages in inflation targeting? The Central Bank will enact expansionary monetary policy. This action will put upward pressure on read GDP. The Central Bank will enact expansionary monetary policy. This action will put downward pressure on read GDP. The Central Bank will enact contractionary monetary policy. This action will put upward pressure on read GDP. The Central Bank will enact contractionary monetary policy. This action will put downward pressure on read GDP.arrow_forward
- Do Monetarists and Keynesians believe that inflation is always and everywhere a monetary phenomenon? Explain your position with the aid of diagram(s).arrow_forwardLarry Summers, Professor of Economics at Harvard and ex-Treasury Secretary and Chief Economist at the World Bank, has been making lots of waves of late. He's expressed his fears that inflation would come in stronger than the Fed expected - he was right -- and now he's predicting that there's factoring in new trends like: 40% chance of a recession ahead as the Fed tightens to reduce inflationary pressures and higher wages force cutbacks in business output. Come up with your own forecast of the next year or two, o supply chains issues (that seem to be easing, by the way) • Fed policy that will turn contractionary o a new $1.7 trillion infrastructure bill to be passed by Congresss o continuation of the rising trend of worker retirements o possible weakening of the dollar alongside rising tensions with Russia.arrow_forwardSuppose that you are employed as an advisor to the central bank. Select the proper policy recommendation or economic prediction for each of the following scenarios. Which policy is appropriate when a rising aggregate price level is a concern but GDP is growing at an acceptable rate? contractionary or restrictive monetary policy (tight money policy) It is unclear which type of monetary policy is appropriate. expansionary monetary policy (easy money policy) Which policy is appropriate when a rising aggregate price level is a concern and GDP is not growing at an acceptable rate? It is unclear which type of monetary policy is appropriate. contractionary or restrictive monetary policy (tight money policy) expansionary monetary policy (easy money policy) Contractionary or restrictive monetary policy (tight money policy) will cause interest rates to increase sometimes and decrease sometimes. decrease. increase.arrow_forward
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