Suppose that the central reacts to a series of negative real shocks by increasing the money supply every time, what will happen to the price level? And the inflation rate?
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Suppose that the central reacts to a series of negative real shocks by increasing the money supply every time, what will happen to the
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- How does the Classical Theory of Inflation explain the impact of changes in money supply on the general price level and what role does the velocity of money play in this theory?Suppose news at time ta leads to the expectation that money supply growth will fall to zero at time t0. Assuming expectations are correct, graph the behavior of the money supply, real balances, the price level, and the spot [Comment: although the price level falls at ta, it may end up higher than it started by t0.]Discuss whether it is possible for policymakers to trade off more inflation for higher output in the short run and the long run. Explain from the new classical and new Keynesian perspective.
- 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 levelSuppose that changes in bank regulations expand the availability of credit cards to that people can hold less cash. If the Fed does not respond to this event, what will happen to the price level?When aggregate output is below the natural rate of output, what happens to the inflation rate over time if theaggregate demand curve remains unchanged? Why?
- Assume that a country’s economy is in a short-run equilibrium and the actual unemployment rate is lower than the natural rate of unemployment. Using a correctly labeled graph of the long-run aggregate supply curve, short-run aggregate supply curve, and aggregate demand curve, show each of the following. Current price level, labeled PL1, and current output level, labeled Y1 The full-employment output level, labeled YF. What open-market operation can the country’s central bank use to move the economy toward its long-run equilibrium? Use a correctly labeled money-market graph to show how the country’s central bank action to move the economy toward its long-run equilibrium affects the equilibrium nominal interest rate in the short run. Based on the interest rate change from part (c), will each of the following increase, decrease, or remain the same in the short run? Real output. Explain. Natural rate of unemployment Assume instead that the central bank does not pursue…Suppose that changes in bank regulations expand the availability of credit cards to that people can hold less cash. If the Fed wants to keep this price level stable, what should it do?In the “Classical Theory of Inflation”, what determines the price level and the value of money? Explain using a supply and demand plot.
- What is stagflation? How may it affect the Phillips Curve? What policy measures may be taken to reduce stagflation?Show using an aggregate supply and demand curve diagram, how an initial increase inaggregate demand though monetary policy may have no effect on output if workers with“rational expectations” seek wage rises to compensate for the expected higher price level.According to the pure expectations theory, the short term rates will exceed long term rates whenever market participants expect short term rates to increase in the future. True/False?
