Principles of Economics (MindTap Course List)
8th Edition
ISBN: 9781305585126
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 (MindTap Course List)
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- You'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_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_forwardSuppose a country has a money demand function (M/P)ª = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. a. What is the average inflation rate? b. How would inflation be different if real income growth were higher? Explain. c. How do you interpret the parameter k? What is its relationship to the velocity of money? d. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.arrow_forward
- please answer in text form and in proper format answer with must explanation , calculation for each part and steps clearlyarrow_forwardDescribe in detail the costs of inflation. Be sure to differentiate between expected and inflation.arrow_forwardQuestion 9 Using the Fed model linking the IS-MP framework with the Phillips curve, draw a graph that illustrates the following scenario: Expected inflation is 1.5%. The economy is initially in macroeconomic equilibrium with a real interest rate of 3%, an output gap of -1%, and an actual inflation rate of 1%. Upload Choose a Filearrow_forward
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