Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 15, Problem 4QR
To determine
Explain the increasing response of the interest rates to inflation.
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Describe how changes in expected inflation
impact an economy in the wake of a temporary
negative supply shock.
Hello, I need help with a macroeconomics question. Thank you in advance!
The answers are based on a short exerpt from the Federal Reserves press release from Feb 1, 2023 (attatchde below).
7. What do you expect to happen to the money supply?
8. What do you expect to happen to the inflation rate?
9. How would you expect all these decisions to affect employment in the economy?
10. How do the effects you found on 8 and 9 align with what the Fed was hoping to attain?
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.
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- 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_forwardFiscal and Monetary Policies Nowadays, many Central Banks use target inflation in their monetary policy framework to achieve a stable and low level of inflation. Related to that, do you agree with the statement that says “by only focusing on achieving inflation target, the Central Bank will not be able to control the economy’s output fluctuation.” Explain your answer by using an appropriate theory, model/equationarrow_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 (a long explanation) how the credibility of each country’s central bank affect economic outcomes, if both countries are hit with the same b) negative temporary aggregate supply shock?arrow_forward
- In detail, explain how high inflation can lead to a recession in several ways.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_forwardQuestion 25 Consider a standard AD-AS model. Suppose that the central bank lost credibility in the sense that people no longer believe its inflation target (that is, inflation expectations are not `anchored'). In this case, a permanently higher inflation target leads to a short-run increase in output but no long-run increase in output. Answer True or False. Remember to include your explanation.arrow_forward
- What is the fundamental tradeoff faced by The Fed when responding to a negative real shock? (Three sentences or less)arrow_forwardSome central banks like the Reserve Bank of New Zealand are more concerned about price fluctuation than output fluctuation while other central banks are more concerned about output fluctuation. Explain the impact of a supply shock on inflation and output of the economy under the alternative positions of different central banks. Use appropriate graphs.arrow_forwardAnswer the following using relevant models and / or graphs: (1) Explain the factors that affect inflation in the short and medium term.arrow_forward
- Suppose the Central bank announces today a change in monetary policy: it is increasing target inflation from 2% to 3%. Using the 3-equation model under adaptive expectations, explain how the economy adjusts to the change in monetary policy. (you need to use the graph, and explain in detail how the economy reacts to this change).arrow_forwardWhen a central bank has driven down short-term nominal interest rates to nearly zero, the monetary policy can do nothing more to stimulate the economy. True or false? Explain.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
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