Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781305971509
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.
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…
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.
Chapter 22 Solutions
Principles of Macroeconomics (MindTap Course List)
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- 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.arrow_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_forwardWhich of these is an alternative to monetary policy and aims to reduce inflation? reduce the money supply raise government purchases reduce taxes increase taxesarrow_forward
- Does the effectiveness of monetary policy depend on inflationexpectations? Explainarrow_forwardIn the simple monetary policy rule considered in Chapter 13, what role does the parameter m_bar (letter “m” with a short bar above it) play? It stands for the rate of inflation It tells us how unemployment changes when output changes It governs how aggressively monetary policy responds to inflation None of the above (i.e., something else)arrow_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_forward
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