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 7PA
Sub part (a):
To determine
The impact of contradictory monitory policy in different economic situations.
Sub part (b):
To determine
The impact of contradictory monitory policy in different economic situations.
Sub part (c):
To determine
The impact of contradictory monitory policy in different economic situations.
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On March 20, 2024, the statement that best describes the Federal Reserve's stance on inflation and interest rates for 2024 is:
Inflation is
on a
road to %.
Choose the words that best fill in the blanks.
Multiple Choice
moving down slowly, sometimes bumpy, 2%
moving down slowly, sometimes bumpy, 3%
moving down slowly, smooth, 3%
moving down quickly, sometimes bumpy, 2%
moving down quickly, sometimes bumpy, 3%
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The Federal Reserve uses an inflation target of 2-3%; most economists agree that the US natural rate of unemployment is around 4.5%.
Imagine that you are a policy analyst observing the government and the Federal Reserve. You determine that inflation is 1% (very low) and unemployment is hovering around 6.5% (quite high.)
The Federal Reserve responds by cutting interest rates and beginning to buy government bonds in open-market operations.
The government takes the position that the only way out of a recession is to decrease government spending and passes a budget with very little spending (this is called "taking austerity measures").
What effects would the Fed's actions have, if taken alone? What effects would the government's actions have, if taken alone? What do you predict will occur when both actions are taken? Who do you think is making the right suggestion?
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
Chapter 35 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- Which of the following statements best describes the Federal Reserve's dual mandate. A stable financial system and stable inflation at 2%. B Maximum employment and 0% inflation C Maximum employment and long-run inflation at 2% D Full employment, 4% unemployment rate, and low, stable inflationarrow_forwardI need the answer as soon as possiblearrow_forwardThe inflation rate is 12 percent, and the central bank is considering slowing the rate of money growth to reduce inflation to 8 percent. Economist Carlos believes that expectations of inflation change quickly in response to new policies, whereas economist Felix believes that expectations are very sluggish. 1. True or False: Economist Felix is more likely to favor using contractionary policy to reduce inflation than economist Carlos.arrow_forward
- In order to combat inflation, the Fed will ________ the federal funds rate thereby ________ the quantity of money. a. raise; increase b. lower; increase c. raise; decrease d. lower; decreasearrow_forwardSupposed that followed by an unexpected discovery of new oil reserves there is a reduction in oil prices. What policy suggestion makes it possible to keep the inflation rate at its rate prior to the discovery without changing the target for federal funds rate? A)An increase in income taxes. B)An across the board decrease in corporate profit taxes. C)An open market purchase if reserves are scarce. D)An increase in ONRRP rate.arrow_forwardYou're a pricing analyst for a manufacturing firm. You are tasked with predicting how average prices will change over the next quarter to help your manager decide how to change her prices. How might you find the best estimate of the likely inflation rate? For the best estimate, obtain the average forecast of many economists. look to the financial markets. analyze surveys of people's inflation expectations. rely on the forecast of an eminent economist.arrow_forward
- help please answer in text form with proper workings and explanation for each and every part and steps with concept and introduction no AI no copy paste remember answer must be in proper format with all workingarrow_forwardSuppose the economy is in a long-run equilibrium.a. Draw the economy’s short-run and long-run Phillips curves.b. 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?c. 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 in part (b)arrow_forwardWhy are inflation expectations so important to modern monetary policy? What are several ways that central banks try to manage inflation expectations?arrow_forward
- (Problem 3, Page 477) In a certain economy the expectations-augmented Phillips curve is π = π² − 2 (u – ū) and ū= 0.06. a. Graph the Phillips curve of this economy for an expected inflation rate of 0.10. If the Fed chooses to keep the actual inflation rate at 0.10, what will be the unemployment rate? b. An aggregate demand shock (resulting from increased military spending) raises expected inflation to 0.12 (the natural unemployment rate is unaffected). Graph the new Phillips curve and compare it to the curve you drew in Part (a). What happens to the unemployment rate if the Fed holds actual inflation at 0.10? What happens to the Phillips curve and the unemployment rate if the Fed announces that it will hold inflation at 0.10 after the aggregate demand shock, and this announcement is fully believed by the public? c. Suppose that a supply shock (a drought) raises expected inflation to 0.12 and raises the natural unemployment rate to 0.08. Repeat Part (b).arrow_forwardIn the graph you've just made, what is the unemployment rate and the inflation rate if the Fed overstimulates but the expected inflation rate remains at 2 percent? The unemployment rate _______ percent and the inflation rate _______ percent. A. decreases to 4; rises to 3 B. remains at 8; remains at 1 C. decreases to 5; rises to 4 D. decreases to 5; rises to 2arrow_forwardExplain The FED's inflation Targetarrow_forward
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