Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 13, Problem 9E
(a)
To determine
Explain the economic justification for a Taylor’s rule.
(b)
To determine
Combine the Taylor’s rule with IS curve.
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Monetary Policy: End of Chapter Problems
9. An economy is in long-run macroeconomic equilibrium with an unemployment rate of 5% when the government
passes a law requiring the central bank to use monetary policy to lower the unemployment rate to 3% and keep it there.
The central bank can achieve this goal in the short run by pursuing an expansionary -
monetary policy.
In the accompanying diagrams, shift the AD, LRAS, and/or SRAS curves and move the equilibrium point to its new
position to illustrate the short-run and long-run changes when the central bank pursues this policy.
Aggregate price level
10
9
10
T 10
Ka
23
Economy in the Short Run
LRAS
Real GDP
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E
SR
AD
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47
SRAS
05
Aggregate price level
P3
contact
W
Economy in the Long Run
Real GDP
EPIC
LRAS
SRAS
AD
Suppose that you are employed as an advisor to the central bank. Select the proper policy recommendation or economic prediction for each of the following scenarios.
Which policy is appropriate when a rising aggregate price level is a concern but GDP is growing at an acceptable rate?
contractionary or restrictive monetary policy (tight money policy)
It is unclear which type of monetary policy is appropriate.
expansionary monetary policy (easy money policy)
Which policy is appropriate when a rising aggregate price level is a concern and GDP is not growing at an acceptable rate?
It is unclear which type of monetary policy is appropriate.
contractionary or restrictive monetary policy (tight money policy)
expansionary monetary policy (easy money policy)
Contractionary or restrictive monetary policy (tight money policy) will cause interest rates to
increase sometimes and decrease sometimes.
decrease.
increase.
Consider the economy represented by the aggregate supply-aggregate demand
graph below, which is initially at a short-run equilibrium at point A. How could
monetary policy be used to improve the economy?
Price level
(GDP deflator.
2009-100)
Pi
IRASI
SRASI
AD₂
GDP
GDP*
Real GDP (trillions of 2009 dollars)
Contractionary monetary policy could be used to increase economic growth.
Expansionary monetary policy could be used to decrease prices.
Expansionary monetary policy could be used to increase GDP to its potential.
Contractionary monetary policy could be used to lower unemployment.
Chapter 13 Solutions
Macroeconomics (Fourth Edition)
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Similar questions
- Which of the following is NOT an example of monetary policy to restrict aggregate demand? a)Raising interest rates b)Reducing money supply c)Rationing credit d)Increasing income taxarrow_forwardIf the LRAS curve shifts, does the AS curve also have to shift? If the AS curve shifts, does the LRAS curve also have to shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other curve.) The Federal Reserve can use expansionary/contractionary policy to shift the AD curve. Use the AD–AS framework to show how monetary policy should be used to return output to potential GDP when: (i) the aggregate demand curve intersects the short-run aggregate supply curve to the left of potential GDP; and (ii) the aggregate demand curve intersects the short-run aggregate supply curve to the right of potential GDP. Given that the economy can correct itself and return to potential GDP, why would the Fed pursue contractionary monetary policy following a negative aggregate supply (inflation) shock? How could the Fed pursuing a contractionary monetary policy be preferable to the economy correcting itself? Is it possible that a contractionary monetary…arrow_forwardDuring a 2008 interview, then German Finance Minister Peer Steinbrueck said, "We have to watch out that in Europe and beyond, nothing like a combination of downward economic [growth] and high inflation rates emerges-something that experts call stagflation." Such a situation can be depicted by the movement of the short-run aggregate supply curve from its original position, SRAS,, to its new position, SRAS2, with the new equilibrium point E2 in the accompanying figure. In this question, we try to understand why stagflation is particularly hard to fix using fiscal policy.arrow_forward
- State the main features of the monetary model. Use the model to analyse the impact of an expansionary monetary policy.arrow_forwardThe mandate of the South African Reserve Bank (SARB) states that “the Reserve Bank is required to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa”. There are several macroeconomic determinants that in many ways affect the outlook of the economy, such as inflation, growth, interest rates, unemployment and exchange rates. There has been an ongoing conversation among economists and politicians about the mandate of the SARB. Do you think that the mandate of the SARB should change? Support your view.arrow_forwardSylvia, a writer for a newspaper, interviewed top managers at 50 large corporations. All of the managers indicated that the primary determinant of planned investment is the interest rate and not their expected sales. In addition they all told her that their desired investment function is very flat. From this information, if Sylvia is a good macroeconomist, she would conclude that Group of answer choices neither expansionary nor contractionary monetary policy would be very effective. both expansionary and contractionary monetary policy would be very effective. fiscal policy would be very effective, but monetary policy would not be very effective. fiscal policy would not be very effective, but monetary policy would be very effective.arrow_forward
- Hello, I need help with a macroeconomics question. Thank you in advance! The answers are based on a short exerpt from the Federal Reserves press release from Feb 1, 2023 (attatchde below). 7. What do you expect to happen to the money supply? 8. What do you expect to happen to the inflation rate? 9. How would you expect all these decisions to affect employment in the economy? 10. How do the effects you found on 8 and 9 align with what the Fed was hoping to attain?arrow_forwardA monetary policy that reduces the amount of money and loans in the economy is a contractionary monetary policy or a “tight” monetary policy. A monetary policy that expands the quantity of money and loans is known as an expansionary monetary policy or a “loose” monetary policy. Tight or contractionary monetary policy that leads to higher interest rates and a reduced quantity of loanable funds will reduce two components of aggregate demand. Conversely, a loose or expansionary monetary policy that leads to lower interest rates and a higher quantity of loanable funds will tend to increase business investment and consumer borrowing for big-ticket items. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins. Note:- Do not provide handwritten solution. Maintain…arrow_forwardIf investment and consumption expenditures fall and cause GDP to fall, what is an appropriate monetary policy? Question 36 options: increase monetary base growth and decrease interest rates increase taxes and decrease government expenditures decrease monetary base growth and increase interest rates decrease taxes and increase government expendituresarrow_forward
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