Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 10, Problem 3PA
(a)
To determine
The impact of Fed to the response in shocks.
(b)
To determine
The steady state of the economy.
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Students have asked these similar questions
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.
When the economy is hit by a real shock, some economists think that the best response is for the Fed to do nothing. They fear that there is no good response to a real shock. Why is that? Explain.
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
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- Suppose 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_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_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
- Expected inflation is 1.5%. The economy is initially in macroeconomic equilibrium with a real interest rate of 3% and an output gap of 0%. That is, the economy is operating at its potential. Using the Fed model linking the IS-MP framework with the Phillips curve, draw a graph showing the effect of the following shock: A severe recession impacts most of Western Europe, where several of the US most important trade partners are located. Your graph should clearly indicate the conditions both before and after the shock.arrow_forwardSuppose country A has a central bank with full credibility, and country B has a central bank with no credibility.Using a graph of aggregate demand and supply EXPLAIN how the credibility of each country’s central bank affect economic outcomes, if both countries are hit with the same a) positive aggregate demand shock? b) negative temporary aggregate supply shock?arrow_forwardSuppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that, due to increased instability in the financial markets, a decrease in investor and consumer confidence occurs. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants the economy to return to full-employment as quickly as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."arrow_forward
- QUESTION 1 "In period 0 (before the shock), draw the recording table where you keep track of inflation expectations, shocks, interest rates, SRO and actual inflation for each period. Draw also the diagram corresponding to a situation where there are no AD shocks (a=0), the Fed sets the real interest rate equal to the MPK (R=r), and there are no inflation shocks either (o=0). Label the initial equilibrium as point A in the diagram, both in the top and bottom parts of the diagram. Which of the statements below is correct?" SRO will be equal to zero and inflation equal to the target rate. SRO will be positive and inflation equal to the target rate. SRO will be positive and inflation equal to the previous period's inflation rate. SRO will be negative and inflation equal to the previous period's inflation rate.arrow_forwardQuestion Two Policy makers can respond to shocks in two possible ways i.e. no policy response and policy stabilisation of economic activity and inflation. Use the AS- AD framework to demonstrate how aggregate output and inflation would perform following an aggregate demand shock accompanied by monetary policy stabilisation measures Show how the outputs above would differ in case of a permanent shock on supply using the AD-AS framework. Discuss the adage that inflation is always and everywhere a monetary phenomenon. What are some of the practical limitations of this assertionarrow_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_forward
- Describe how changes in expected inflation impact an economy in the wake of a temporary negative supply shock.arrow_forwarda) Consider an AD-AS model with Static Expectations. Show how changes in monetary policy generate short-run movements in output. (b) Consider an AD-AS model with Rational Expectations. Show how changes in the unanticipated component of monetary policy generate short-run movements in output. (c) Explain how overlapping wage contracts generate persistence in output when there are monetary policy shocks.arrow_forwardConsider an economic shock that results in a decrease in aggregate demand for the economy, creating an output gap where GDP is lower than potential.In the short run, what is the expected changes to firm production levels, the price level in the economy, and the unemployment rate?2. In the medium run, what happens to capacity utilization? How do changes to capacity and unemployment cause pressure for lower inflation? What is the expected response from the Federal Reserve? 3. In the long run, what is the expected outcome for GDP, unemployment, and inflation if monetary policy is successful?arrow_forward
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