PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 15, Problem 8RQ
Why, in the absence of public beliefs that the central bank is committed to maintaining low inflation, does an adverse inflation shock pose a particularly difficult dilemma for policymakers? (LO3)
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In March of 2020, the Bank of Canada dropped the policy interest rate three times. Were these action in line with an inflation control policy?
Which of the following is true of Advantages of the US implicit Nominal Anchor?
Select one:
a.
The Fed’s forward-looking behavior and stress on price stability also help to discourage overly expansionary monetary policy, thereby ameliorating the time consistency problem.
b.
It does not enable monetary policy to focus on domestic considerations.
c.
It relies on a stable money-inflation relationship.
d.
None of the above
Suppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy. This monetary policy action ________(Decreases, Increases) demand for goods and services in the economy, leading to ________(Higher, Lower) prices for products. In the short run, the change in prices induces firms to produce ________(Fewer, morer) goods and services. This, in turn, leads to a ___________(Higher, Lower) unemployment level. Based on this analysis, the economy faces the following trade-off between inflation and unemployment: Higher inflation leads to _________(Higher, Lower) unemployment.
Chapter 15 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
Ch. 15.A - Prob. 15A.1CCCh. 15 - Prob. 1RQCh. 15 - Prob. 2RQCh. 15 - Prob. 3RQCh. 15 - Prob. 4RQCh. 15 - Prob. 5RQCh. 15 - Prob. 6RQCh. 15 - Prob. 7RQCh. 15 - Why, in the absence of public beliefs that the...Ch. 15 - Prob. 9RQ
Ch. 15 - Prob. 10RQCh. 15 - Prob. 1PCh. 15 - For the economy in Problem 1, suppose that...Ch. 15 - Prob. 3PCh. 15 - Prob. 4PCh. 15 - For each of the following, use an AD-AS diagram to...Ch. 15 - Prob. 6PCh. 15 - Suppose that a permanent increase in oil prices...Ch. 15 - An economy is initially in recession. Using the...Ch. 15 - Prob. 9PCh. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 15.1CCCh. 15 - Prob. 15.2CCCh. 15 - Prob. 15.3CCCh. 15 - Prob. 15.4CCCh. 15 - Prob. 15.5CCCh. 15 - Prob. 15.6CCCh. 15 - Prob. 15.7CCCh. 15 - Prob. 15.8CCCh. 15 - Prob. 15.9CCCh. 15 - Prob. 15.10CC
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- Continuing to work with a 2% inflation target, a 1999 version of the Taylor Rule and an initial nominal policy rate of 1.5%, now consider the impact of including a variable risk premium that is typically positive, meaning that the market interest rate is usually above the central bank policy rate. In the following questions, assume the normal (natural) risk premium is 100bp, the economy has a negative output gap (minus 1%), the actual risk premium is 300bp, the economy’s natural real market interest rate is 2% and that both actual and expected inflation is 1%. 5a) what nominal policy rate would you recommend? 5b) what is the natural nominal policy interest rate? 5c) how does the new market real interest rate compare with its initial level? 5d) what nominal policy rate would the Taylor Rule recommend if the negative output gap then widened to minus 2% and both current and expected inflation fell to zero? (other factors, including the risk premium remaining unchanged)arrow_forwardGive two specific reasons why inflation in Canada is higher than normal.arrow_forwardSuppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy. This monetary policy action demand for goods and services in the economy, leading to prices for products. In the short run, the change in prices induces firms to produce goods and services. This, in turn, leads to a unemployment level. Based on this analysis, the economy faces the following trade-off between inflation and unemployment: Higher inflation leads to unemployment. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- Consider the AD/AS model with a constant inflation rate. It is possible that the money supply is rising while interest rates are unchanged because... a. Declining interest rates cause the investment demand curve to shift to the left, which causes interest rates to rise back to their original level. b. The rising price level increases money demand, offsetting the impact of the rising money supply. c. The rising price level decreases money demand which pushes up interest rates. d. Declining interest rates cause the investment demand curve to shift to the right, which causes interest rates to rise back to their original leve. e. The money transmission mechanism does not apply in a situation of sustained inflation.arrow_forwardRefer to the Reserve Bank news release below. Use the AD/AS model to answer how each of the economic factors stated are affecting inflation and economic growth. Official Cash Rate unchanged at 1.5 percent Date 26 June 2019 The Official Cash Rate (OCR) remains at 1.5 percent. Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives. Domestic growth has slowed over the past year. While construction activity strengthened in the March 2019 quarter, growth in the services sector continued to slow. Softer house prices and subdued business sentiment continue to dampen domestic spending. The global economic outlook has weakened, and downside risks related to trade activity have intensified. A number of central banks are easing their monetary policy settings to support demand. The weaker global economy is affecting New Zealand through a range of trade, financial, and confidence channels. We…arrow_forwardRefer to the Reserve Bank news release below. Use the AD/AS model to answer how each of the economic factors stated are affecting inflation and economic growth. Official Cash Rate unchanged at 1.5 percent Date 26 June 2019 The Official Cash Rate (OCR) remains at 1.5 percent. Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives. Domestic growth has slowed over the past year. While construction activity strengthened in the March 2019 quarter, growth in the services sector continued to slow. Softer house prices and subdued business sentiment continue to dampen domestic spending. The global economic outlook has weakened, and downside risks related to trade activity have intensified. A number of central banks are easing their monetary policy settings to support demand. The weaker global economy is affecting New Zealand through a range of trade, financial, and confidence channels. We…arrow_forward
- Core inflation is more volatile than headline inflation. True False Speculative demand for money falls when the opportunity cost of money rises. True Falsearrow_forwardSuppose that people expect inflation to equal 3 percent, but in fact prices rise by 5 percent. Indicate whether this unexpected higher rate of inflation would help or hurt each of the following groups. a homeowner with a fixed-rate mortgage. a union worker with a fixed labor contract a company that has invested some of its endowment in government bond which pay fixed rate of return.arrow_forwardAssuming prices and output are somewhat flexible, an increase in consumer spending will cause inflation to __________ in the short run and growth to ___________ in the short run. increase/decrease increase/increase decrease/increase decrease/decrease uncertain/decreasearrow_forward
- The following graph plots the short-run and long-run Phillips curves (SRPC and LRPC, respectively) for an economy currently experiencing long-run macroeconomic equilibrium at point A, where the natural unemployment rate is 6% and the inflation rate is 8% per year. Suppose that the central bank for this economy has decided that inflation is too high and thus wants to decrease the inflation rate by 6 percentage points per year. A reduction in the rate of inflation is known as (deflation/disinflation) . To reduce inflation from 8% to 2% in the short run, the central bank would have to accept an unemployment rate of ____% True or False: If people have rational expectations, the economy may not have to endure an unemployment rate as high as predicted by the short-run Phillips curve. -True -Falsearrow_forwardTrue or False : Inflation is a genuine issue for retirement planning because a person age 65 will on average live between 18 and 20 years and the cost of goods can double over that period of timearrow_forwardIf you were to learn that a bottle of Gatorade increased in size from 2009 to 2010 by 100 percent, should that information affect your calculation of the inflation rate? If so, how? 2009 Gatorade $1 each qty 1 2010 Gatorade %2 each qty 1arrow_forward
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