Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 10, Problem 5QR
To determine
Fed deals with demand shocks better than supply shocks.
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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.
How do changes in aggregate demand and aggregate supply might cause inflation in the economy?
are anti-inflationary policies effective when there are adverse supply shocks? which monetary or fiscal policy would be more effective?
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- How does aggregate demand affect inflation? How do interest rates affect aggregate demand?arrow_forwardIf there is a decrease in inflation what happens to aggregate supply. Aggregate demand would shift downwards because it would fall but would supply be affected by this? With this shift in inflation and the decrease in demand what would policy makers do in response to this?arrow_forward“Policymakers would never respond by stabilizing output in response to a temporary positive supply shock.”Is this statement true, false, or uncertain? Explain youranswerarrow_forward
- Explain whether policy makers should be more concerned about the economy going into a recession or facing high inflation and why.arrow_forwardWhy do temporary negative supply shocks pose adilemma for policymakers?arrow_forwardA stimulative monetary or fiscal action should increase aggregate demand. What factors may limit the actual increase in aggregate demand?arrow_forward
- Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. EXPLAIN how the credibility of each country’s central bank affect economic outcomes, if both countries are hit with the same positive aggregate demand shock?arrow_forwardWhat type of policy are this using (expansionary or contractionary)? How will it impact unemployment, GDP, inflation? How will it impact aggregate supply and demand? Will these changes harm our economy? Are they worth it?arrow_forwardDraw the short-run trade-off between inflation and unemployment. How might the Fed move the economy from one point on this curve to another?arrow_forward
- Explain what types of policies the federal government may have implemented to restore aggregate demand and the potential obstacles policymakers may have encountered.arrow_forwardIf the economy is able to self-correct from a negative GDP gap, why might the Fed wish to intervene in the market?arrow_forwardSuppose that survey measures of consumer confidence indicate a wave of pessimism is sweeping the country. If policymakers do nothing, what will happen to aggregate demand? What should the Fed do if it wants to stabilize aggregate demand? If the Fed does nothing, what might Congress do to stabilize aggregate demand?arrow_forward
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