Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781337091985
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 17, Problem 4PA
Subpart (a):
To determine
Economy’s short-run and long-run Phillips curves.
Subpart (b):
To determine
Economy’s short-run and long-run Phillips curves.
Subpart (c):
To determine
Economy’s short-run and long-run Phillips curves.
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a) What is Phillips curve? Draw the short-run Phillips curve and the long-run Phillips curve. Explain why they are different.
b) Suppose the economy is in a long-run equilibrium. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). If the RBI undertakes expansionary/contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? (b) What is sacrifice ratio?
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)
The economy of Djibulistan is initially in long-run equilibrium. Then the CentralBank of Djibulistan increases the money supply.a. Assuming unexpected inflation as a result of the above-mentioned policy,explain any changes in output, unemployment, and inflation that arecaused by the monetary expansion. Explain your answer and conclusionsusing three graphs: IS-LM, AD-AS, and the Phillips curve. b. Assuming instead that resulting, inflation is expected, explain any changesin output, unemployment, and inflation that are caused by the monetaryexpansion. Explain your answer and conclusions using three graphs: ISLM, AD-AS, and the Phillips curve.
Chapter 17 Solutions
Brief Principles of Macroeconomics (MindTap Course List)
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- The long-run effects of monetary policy The following graphs show the state of an economy that is currently in long-run equilibrium. The first graph shows the aggregate demand (AD) and long-run aggregate supply (LRAS) curves. The second shows the long-run and short-run Phillips curves (LRPC and SRPC). 1. Suppose the central bank of the economy increases the money supply. Show the long-run effects of this policy on both of the graphs by shifting the appropriate curves (Please use the images attached) 2. Which of the following statements are true based on these graphs? Check all that apply. a. The natural rate of unemployment is 6%. b.The natural level of output is 6%. c.It is impossible to determine the natural rate of unemployment from these graphs alone.arrow_forwardSuppose the U.S. economy is initially at long run equilibrium, when there is an unexpected economic boom across Europe in the country.How does this impact the U.S. economy? (write out either "inflationary" or "recessionary" In response to this what monetary policy would the Fed employ? (write one of the following: "raise taxes", "lower taxes", "raise money supply", or "lower money supply"What is the most likely way the Fed will accomplish this change in the monetary policy? (write one of the following: "buy securities", "sell securities", "raise discount rate", "lower discount rate", or "legislation"This action by the Fed will cause interest rates to _______. (Write out "increase" or "decrease"The end result of the monetary policy is a shift of which curve in which direction. (Write out one of the following: "AD right", "AD left" "AS left", "AS right"arrow_forwardSuppose the U.S. economy is initially at long run equilibrium, when there is an unexpected large decrease in government spending in the country.How does this impact the U.S. economy? (write out either "inflationary" or "recessionary" In response to this what monetary policy would the Fed employ? (write one of the following: "raise taxes", "lower taxes", "raise money supply", or "lower money supply"What is the most likely way the Fed will accomplish this change in the monetary policy? (write one of the following: "buy securities", "sell securities", "raise discount rate", "lower discount rate", or "legislation"This action by the Fed will cause interest rates to _______. (Write out "increase" or "decrease"The end result of the monetary policy is a shift of which curve in which direction. (Write out one of the following: "AD right", "AD left" "AS left", "AS right"arrow_forward
- The time inconsistency of policy implies that a. what policymakers say they will do is generally what they will do, but people don't believe them because of current policy. b. when people expect that inflation will be low, it is easier for the Fed to increase output by increasing the money supply. c. people will believe Fed policy will be less inflationary than the Fed claims. d. what policymakers say they will do is usually not what they do, but people believe them anyway.arrow_forwardA movement to the right along a given short-run Phillips curve could be caused by a. contractionary monetary policy, but not an increase in the natural rate of unemployment. b. expansionary monetary policy, but not an increase in the natural rate of unemployment. c. an increase in the natural rate of unemployment or a contractionary monetary policy. d. an increase in the natural rate of unemployment or expansionary monetary policy.arrow_forwardA movement to the left along a given short-run Phillips curve could be caused by a. contractionary monetary policy, but not a reduction in the natural rate of unemployment. b. expansionary monetary policy, but not a reduction in the natural rate of unemployment. c. a reduction in the natural rate of unemployment or expansionary monetary policy. d. either a reduction in the natural rate of unemployment or a contractionary monetary policy.arrow_forward
- The main problem of a government constantly using monetary policy to reduce unemployment, as guided bythe Phillips curve is:(a) people eventually update their expectations, shifting the Phillips curve to the right, worsening theinflation-unemployment trade-off(b) people increase their demand for money very fast, rendering monetary policy more difficult(c) eventually hitting the zero lower bound, where monetary policy is not effective anymore(d) being exposed to a negative supply shock(e) none of the above is a problemarrow_forwardThe United States Federal Reserve has two mandates when setting monetary policy - keep annual inflation low (around 2-3%) and the unemployment rate low (around 5%). Typically, efforts to adjust the money supply to cause inflation to decrease causes unemployment to increase and vice versa. Now, imagine a situation where the United States faces high inflation and high unemployment (called stagflation, was issue in late 1970s). What do you think the Federal Reserve should do in this situation?arrow_forwardQ.3 . The response of Central Bank to shocks depends on its goal. Suppose Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output and employment at their natural levels. Explain with the help of graph how each Central Bank would respond to the following. i. An exogenous decrease in the velocity of money. ii. An exogenous increase in the price of oil.arrow_forward
- The Fed is fighting recession and it happens to overstimulate the economy. If the expected inflation rate rises above the 2 percent goal, what is the cost of returning the inflation rate back to its goal? The cost of returning the inflation rate back to its goal is _______. A. an inflationary gap and an even higher inflation rate than initially B. unemployment below the natural unemployment rate C. a decrease in potential GDP and aggregate supply D. a recessionary gap and a higher unemployment ratearrow_forwardThe Fed is fighting recession and it happens to overstimulate the economy. If the expected inflation rate rises above the 2 percent goal, what is the cost of returning the inflation rate back to its goal? The cost of returning the inflation rate back to its goal is _______. A. an inflationary gap and an even higher inflation rate than initially B. unemployment below the natural unemployment rate C. a decrease in potential GDP and aggregate supply D. a recessionary gap and a higher unemployment rate Thanks!arrow_forward
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