MACROECONOMICS+SAPLING+6 M REEF HC>IC<
10th Edition
ISBN: 9781319267599
Author: Mankiw
Publisher: MAC HIGHER
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Question
Chapter 15, Problem 1QQ
To determine
The role of central bank in the dynamic model of aggregative demand and aggregative supply.
Expert Solution & Answer
Answer to Problem 1QQ
Option ‘c’ is the correct answer.
Explanation of Solution
Option (c):
The dynamic model of aggregative demand and aggregative supply combines different economic relationships, a rule for
Thus, option (c) is correct.
Option (a):
In reality, many central banks set a target for the interest rate and allow the money supply to adjust to the level necessary to achieve that target, where the target inflation rate is set by the central bank on the basis of economic conditions. Therefore, the central bank cannot ensure that the money supply grows at a constant rate.
Thus, option (a) is incorrect.
Option (b):
The real interest rate has a negative relationship between the demand for goods and services in an economy, while the natural rate of interest rate is the real interest rate at which, in the absence of any shock, the demand for goods and services equals the natural level of output. In the dynamic model of aggregative demand and aggregative supply, it is assumed that the natural rate of interest is constant, that is, the same in every period, but not the real interest rate.
Thus, option (b) is incorrect.
Option (d):
In the dynamic model of aggregate demand and
Thus, option (d) is incorrect.
Economics Concept Introduction
Dynamic model of aggregative demand and aggregative supply: The dynamic model of aggregate demand and aggregate supply describes about the short-run fluctuations in output and inflation and the effects of monetary and fiscal policies on those fluctuations.
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Students have asked these similar questions
Use the dynamic aggregate demand and aggregate supply model to illustrate and explain the monetary policy that the Reserve Bank of Australia implemented when Australia’s inflation rate increased from 6.1% in June 2022 to 7.4% in January 2023. [Hint: Make sure you discuss how the RBA uses cash rate target and open market operations in monetary policy. Include an economic diagram to demonstrate your answers.]
Using the aggregate demand-aggregate supply model, explain and demonstrate graphically the short-run and long-run effects of an increase in the money supply.
(Hint: Draw the figure and show shifts… explain what happens to output and inflation.)
The economy begins in long-run equilibrium. Then one day, the president appoints a new Fed chair. This new chair is well known for her view that inflation is not a major problem for an economy.
a. How would this news affect the price level that people expect to prevail?
b. How would this change in the expected price level affect the nominal wage that workers and firms agree to in their new labor contracts?
c. How would this change in the nominal wage affect the profitability of producing goods and services at any given price level?
Chapter 15 Solutions
MACROECONOMICS+SAPLING+6 M REEF HC>IC<
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