5. Imagine inflation is 10%, and the central bank wants to have inflation equal te 2%. When announcing information about future monetary policy, the central bank brings inflation expectations to 4%. The slope of the Phillips Curve is 1/3. Cost push shocks are zero. How much must short-run output fall to achieve the goal of 2% inflation? tho montof future monotary nolicy

5. Imagine inflation is 10%, and the central bank wants to have inflation equal te 2%. When announcing information about future monetary policy, the central bank brings inflation expectations to 4%. The slope of the Phillips Curve is 1/3. Cost push shocks are zero. How much must short-run output fall to achieve the goal of 2% inflation? tho montof future monotary nolicy

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: The Short-run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 4PA

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Which 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%
Problem 5. Suppose people's inflation expectations are subject to ran- dom shocks: at time t-1, expected inflation in time t is Et-1t = Tt-1+t-1 where nt-1 is a random shock with mean zero but deviates from zero when some event beyond past inflation causes expected inflation to change. Also, Ett+1 = πt +Nt. 3 A. Derive the DAD and DAS equations. Hint: For DAS, express T as a function of (Y - Y); for DAD, express Y, as a function of (T- πt). B. Suppose the economy experiences an inflation scare: in period t, people believe that inflation in t+1 will be higher so nt> 0 (but for this period only). What happens to DAD and DAS in t? Explain what happens to output, inflation, nominal interest rate, and real interest rate. Show a graph and provide labels for equilibrium points (A, B, C, etc.) as needed.
5. Imagine an economy with v = 1/5. Inflation expectations are zero. The economy receives a cost push shock & = 0.1. How negative must short run-output be so that %3D inflation is equal to 2%. 6. Imagine inflation is 10%, and the central bank wants to have inflation equal to 2%. When announcing information about future monetary policy, the central bank brings inflation expectations to 4%. The slope of the Phillips Curve is 1/3. Cost push shocks are zero. How much must short-run output fall to achieve the goal of 2% inflation? 7. Repeat the last exercise assuming that the announcement of future monetary policy is less effective, bringing inflation expectations to 8%.
1. Are the implications of the rational and adaptive expectations hypotheses different in the short-run? A.No, because under both theories people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. B.Yes, because under adaptive expectations there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the rational expectations implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. C.Yes, because under rational expectations theory there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the adaptive expectations theory implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. D. No, because under both theories, there is a significant time…
29) An inflation rate targeting rule A) reduces uncertainty about monetary policy. means that the inflation rate must exceed 5 percent in order for the rule to be effective. nas been adopted the by the Fed in response to the financial crisis of 2008-2009. D) will not work if the Fed continues to sue open market operations. 30) "As the Fed Chases Inflation, Critics Shout, 'Faster!" "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "..the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake." www.nytimes, 7/1/2004 Economists estimate that if the Fed's policy was enacted in…
Place “MON,” “RET,” or “MAIN” beside the statements that most closely reflflect monetarist, rational expectations, or mainstream views, respectively:a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.b. Downward wage inflexibility means that declines in aggregate demand can cause long-lasting recession.c. Changes in the money supply M increase PQ; at first only Q rises because nominal wages are fixed, but once workers adapt their expectations to new realities, P rises and Q returns to its former level.d. Fiscal and monetary policies smooth out the business cycle.e. The Fed should increase the money supply at a fixed annual rate.
The proponents of rational expectations argue that it is possible to reduce inflation without causing any recession if: (i) The policymakers' plan to reduce inflation is announced before people form their expectations. (ii) The policymakers' plan to reduce inflation adjusts when people change their expectations. (iii) The people believe the policy announcement on inflation reduction. Either (i) or (ii) Both (i) and (iii) O c. c. Either (i) or (iii) O d. Both (i) and (ii) a. O b.
18. Suppose the Federal Reserve Chairman expands the money supply each year at the same annual rate as the growth of the economy's production capacity. This illustrates: a) a monetary ruke b) the use of discretionary fiscal policy c) the use of discretionary monetary policy d) the crowding out effect 19. The traditional Phillips curve is bused on the idea that with a constant short-run aggregate supply curve, the larger the increase in aggregate demand: a) the less the increase in real output and the higher the rate of inflation b) the greater the increase in real outpot and the higher the rate of inflation e) the greater the increase in real output and the lower the rate of inflation d) the less the increase in real output and the kower the rate of inflation 20. Stagflation's demise during the 1970's and early 1980's resulted in: a) movement along the Phillips curve toward less unemployment b) movement along the Phillips curve toward higher inflation c) a shift in the Phillips curve…
The text proposes the following model of expected inflation x = (1 - 0) x + 0,-1 What do we know about your process of the formation of expected inflation when 0 = 07 OA. Neither last year's inflation rate nor the long-run average inflation rate impact your view on this year's expected rate. OB. Last year's inflation rate will influence you to revise your estimates for this year's expected rate. OC. Regardless of what inflation was last year, you would expect it to be at the long-run average inflation rate this year. OD. Last year's inflation rate and the long-run average inflation rate have an equal impact on your view of this year's expected rate. What do we know about your process of the formation of expected inflation when 0-17 OA. Neither last year's inflation rate nor the long-run average inflation rate impact your view on this year's expected rate OB. Last year's inflation rate will be the only input for you to revise your estimates for this year's expected rate regardless of…
In 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.
The 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% Lower
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 rate Thanks!