Principles of Macroeconomics (MindTap Course List)
7th Edition
ISBN: 9781285165912
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 22, Problem 5PA
To determine
The response of inflation to new policies.
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What did Friedman and Phelps argue about the effectiveness of monetary policies?
As long as people’s inflation expectations were fixed, an increase in the money supply growth rate could not change output in the short or long run.
If people’s inflation expectations were fixed, in the short run, a decrease in the money supply growth rate could raise output and unemployment.
When the money supply growth rate changed, people would eventually revise their inflation expectations so that any change in unemployment created by an increase in the money supply growth rate would be temporary.
When the money supply growth rate changes, people slowly adjust their inflation expectations; therefore, the unemployment rate changes only in the long run but not in the short run.
Monetary policy set with discretion is said to feature an inflation bias because commitment to a rule could achieve lower inflation at no cost in terms of higher unemployment. True or False? Explain.
The Bank of England will prevent members of its interest rate-setting committee from publishing individual opinions on the economy despite a review of its procedures calling for greater transparency. The Bank said a "collective forecast" will remain the centerpiece of the monetary policy committee's monthly reports, effectively barring members from explaining their own views on the likely path of economic growth, inflation, and unemployment. Critics of the Bank's policy said the Bank's governor, Sir Mervyn King, had rejected proposals for the public to see a wider range of views because he wanted to maintain a stranglehold on the direction of policy...In response, the Bank said it agreed some procedures were opaque and there was a need for clear lines of responsibility, but said that criticism of the monetary policy committee, which King chairs, were largely unfounded.
Explain why then-Bank of England Governor Mervyn King would want to prevent members of the monetary policy committee…
Chapter 22 Solutions
Principles of Macroeconomics (MindTap Course List)
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- When a central bank has driven down short-term nominal interest rates to nearly zero, the monetary policy can do nothing more to stimulate the economy. True or false? Explain.arrow_forwardCentral banks should target inflation within a wider band, say 1-4% or even 1-5%, to avoid unnecessary long lasting tightness of Monetary policy.” State True or False and justify your answerarrow_forwardThe "rational expectations" school of economists, including Robert Lucas and Thomas Sargent, argue that changes in monetary policy cannot affect unemployment rates in the short run or long run. True Falsearrow_forward
- Does the effectiveness of monetary policy depend on inflationexpectations? Explainarrow_forwardMost central banks, like the Bank of England, set targets for their economy's inflation rate. The Bank of England has an inflation target of 3.5% per year. According to the Quantity Theory of Money, by how much must the Bank of England grow the money stock in order to hit its inflation target? The Bank of England must decrease the money stock by 3.5% per year. The Bank of England must increase the money stock by 3.5% per year. The Bank of England must decrease the money stock by 3.5% per month. The Bank of England must increase the money stock by 3.5% per month.arrow_forwardPeople hold less money when inflation is high (inflation tax)-this distorts behavior. Discussarrow_forward
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