Are the following statements true or false? Justify your answer with macroeconomic theory. (a) An increase in public expenditure will always increase inflation more than output. (b) With a flexible inflation target, the central bank will emphasize both inflation and inflation exchange rate to an equal degree.
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- Suppose the public believes that a newly announcedanti-inflation program will work and so lowers itsexpectations of future inflation. What will happen toaggregate output and the inflation rate in the short run?19. Contrast demand-pull and bottleneck inflation. Need ASAPIn a decelerating inflation environment (e.g. with inflation rate at 20%, 18%, 14%, .. year after year), using "adaptive inflation expectations" formation, the forecasted future inflation rate is likely to be O systematically biased upward. O systematically biased downward. O always correct. O about correct on average.
- 2. Why does the "quality/new goods bias" arise if the inflation rate is calculated based on a fixed basket of goods?Explain cost Push Inflationary Process in detail.1) Explain the trade off between inflation and output in macroeconomics. 2)Exlain why the government may/may not be able to just randomly implement policies to increase ouput.
- Price stability: Suppose you are the head of the central bank and your mandateis to maintain the price level at a constant value. Explain what you would doto the money supply in response to each of the following events:(a) Real GDP increases by 4% during a boom.(b) Real GDP declines by 1% during a recession.(c) Real GDP is growing at 3% per year.(d) Te velocity of money increases by 2%.(e) Te velocity of money declines by 1%.Suppose the Federal Reserve announced that itWould pursue contractionary monetary policy toReduce the inflation rate. Would the followingConditions make the ensuing recession more or lessSevere? Explain.A. Wage contracts have short durations.B. There is little confidence in the Fed’s determinationTo reduce inflation.C. Expectations of inflation adjust quickly to actualInflationInflation targeting consists of the Federal Reserve using monetary policy to reduce the annual inflation rate by a set amount cach year until the rate of inflation is negative using monetary policy to hold the price of a fixed basket of commodities (wheat, gold) to a 5-6 percent annual rate regularly stating an explicit goal for the rate of inflation over some future period, such as 2 percent inflation over the next two years identifying the sources of inflation and recommending structural changes in the economy that would relieve upward price pressures
- 12. Most business economists and analysts prefer to use measures of "core" inflation, which typically remove which of the following volatile components? O. Energy O. Food O. Housing O. Energy and FoodWhich of the following situations would lead to actual inflation of 3%? A. future inflation is 1%; output-gap inflation is 0%; supply-shock inflation is 2% B. future inflation is 3%; output-gap inflation is 3%; supply-shock inflation is 3% C. future inflation is 1.5%; output-gap inflation is 1.5%; supply-shock inflation is 3% D. future inflation is 0%; output-gap inflation is 3%; supply-shock inflation is - 3% E. future inflation is 3%; output-gap inflation is 0%; supply-shock inflation is - 3%Suppose the current administration decides to decreasegovernment expenditures as a means of cutting theexisting government budget deficit.a. Using a graph of aggregate demand and supply, showthe effects of such a decision on the economy in theshort run. Describe the effects on inflation and output.b. What will be the effect on the real interest rate, theinflation rate, and the output level if the FederalReserve decides to stabilize the inflation rate?