Economics For Today
10th Edition
ISBN: 9781337613040
Author: Tucker
Publisher: Cengage Learning
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Question
Chapter 27, Problem 12SQ
To determine
The hypothesis that argues for stable money supply growth.
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Below are two different quotes about inflation: “Inflation is always and everywhere a monetary phenomenon.”, Milton Friedman “Persistent high inflation is always and everywhere a fiscal phenomenon.", Thomas Sargent Are they compatible with each other? Justify
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Discuss whether it is possible for policymakers to trade off more inflation for higher output in the short run and the long run. Explain from the new classical and new Keynesian perspective.
Chapter 27 Solutions
Economics For Today
Ch. 27.3 - Prob. 1YTECh. 27.6 - Prob. 1YTECh. 27 - Prob. 1SQPCh. 27 - Prob. 2SQPCh. 27 - Prob. 3SQPCh. 27 - Prob. 4SQPCh. 27 - Prob. 5SQPCh. 27 - Prob. 6SQPCh. 27 - Prob. 7SQPCh. 27 - Prob. 8SQP
Ch. 27 - Prob. 9SQPCh. 27 - Prob. 1SQCh. 27 - Prob. 2SQCh. 27 - Prob. 3SQCh. 27 - Prob. 4SQCh. 27 - Prob. 5SQCh. 27 - Prob. 6SQCh. 27 - Prob. 7SQCh. 27 - Prob. 8SQCh. 27 - Prob. 9SQCh. 27 - Prob. 10SQCh. 27 - Prob. 11SQCh. 27 - Prob. 12SQCh. 27 - Prob. 13SQCh. 27 - Prob. 14SQCh. 27 - Prob. 15SQCh. 27 - Prob. 16SQCh. 27 - Prob. 17SQCh. 27 - Prob. 18SQCh. 27 - Prob. 19SQCh. 27 - Prob. 20SQ
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- An economy is currently in a recession. (a) Draw a single correctly labeled graph with both the short-run and long-run Phillips curves. Label the current short-run equilibrium as point X. (b) Is the expected inflation rate greater than, less than, or equal to the actual inflation rate? (c) Will borrowers on fixed-rate loans benefit from the situation that you identified in part (b)? Explain. (d) Assume the government budget is balanced. In the absence of any discretionary policy action, will the government budget move into surplus, deficit, or remain in balance? Explain. (e) On your graph in part (a), show how the economy will adjust in the long run in the absence of any discretionary policy action. (f) Now assume instead the government increases spending without changing taxes to close the recessionary gap. What effect will this policy have on the national debt? (g) Draw a correctly labeled graph of the loanable funds market and show the effect of the change in the national debt…arrow_forwardAccording to the rational-expectations approach, if everyone believes that policymakers are committed to reducing inflation, the cost of reducing inflation—the sacrifice ratio—will be lower than if the public is skeptical about the policymakers’ intentions.Why might this be true? How might credibility be achieved?arrow_forwardA. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?" B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages? C. Provide an example of the book's short-run model being based on "microfoundations."arrow_forward
- Suppose three economies are hit with the same temporary negative supply shock. In country A, inflationinitially rises and output falls; then inflation risesmore and output increases. In country B, inflationinitially rises and output falls; then both inflation andoutput fall. In country C, inflation initially rises andoutput falls; then inflation falls and output eventually increases. What type of stabilization approach dideach country take?arrow_forwardIn the Keynesian view a. all of the above. b. monetary policy can be ineffective when money demand is less interest rate elastic. c. both monetary and fiscal policy can affect income. d. fiscal policy is a more reliable way to stimulate output during a recession.arrow_forwardThe 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_forward
- Explain what kind of monetary policy and fiscal policy tools can be used to fight against inflationarrow_forwardThe Phillips curve in Lowland takes the form of π = 0.04 − 0.6(u − 0.05), where π is the actualinflation rate and u is the unemployment rate. The Phillips curve in Highland takes the form ofπ = 0.08 − 0.4(u − 0.05). The current unemployment rate in both countries is 9 percent (0.09). For both countries, analyze the impact on inflation of a 2% decrease in unemployment? In which country will policymakers face a bigger trade-off if they try to reduce unemployment in the shortrun? Whyarrow_forwardConsider an economy facing a recessionary gap in the short-run. Expansionary fiscal policy leads to _____ while an economy’s self-correcting mechanism leads to _____ Question 39 options: a) deflation; cost-push inflation b) demand-pull inflation; deflation c) deflation; demand-pull inflation d) demand-pull inflation; cost-push inflationarrow_forward
- Q7. What is the Keynesian prescription for inflation? ( Pick 1 letter) A. Keynesians prescribe decreasing aggregate demand through increased government spending B. Keynesians prescribe decreasing aggregate demand through fiscal restraint C. Keynesians prescribe increasing aggregate demand through fiscal restraint 10.arrow_forwardThe economy shown here begins at a 0% output gap. Now suppose that banks begin to fear the risk of default and the risk premium rises by 2%. If inflation expectations remain unchanged, the actual inflation rate will be: A.) 2% higher B.) 1% higher C.) 1% Lower D.) 4% Lowerarrow_forwardA Keynesian economy is described by the following equations. Consumption Cd = 250 + 0.5(Y - T) - 250r Investment Id = 250 - 250r Government purchases G = 300 Government taxes T = 300 Real money demand L = 0.5Y - 500r + πe Money supply M = 3000 Full-employment output Y = 1250 Expected inflation πe = 0 (HINT a: The expected rate of inflation is assumed to equal zero so that money demand depends directly on the real interest rate, which equals the nominal interest rate. Domestic Savings, Sd =Y - C - G. In equilibrium set domestic savings equal to domestic investment, so Sd = Id) Calculate the values of the real interest rate (r), consumption (Cd), and investment (Id) for the economy in general equilibrium.arrow_forward
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