Macroeconomics
13th Edition
ISBN: 9781337617390
Author: Roger A. Arnold
Publisher: Cengage Learning
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Chapter 16.3, Problem 3ST
To determine
Changes in the real
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The Fed increased the target rate of the federal funds rate nine times since December 2015 through December 2018. An increase in the targeted rate implies a reduction in the growth rate of the money supply. Use the rational expectations AD-AS model to show and explain how this policy could affect Y, N, W/P, r, and P in the short and long runs. Use two scenarios: a) Firms accurately anticipate the change in P; b) They initially underestimate the change in P. What are the implications for monetary policy of the rational expectations model? Many critics said that the Fed's policy move would reduce economic growth. How can their arguments be countered? Note that the Fed has been very public about announcing its policy decisions since 1994.
In what way might society gain if the Fed implements an anti-recessionary policy
instead of simply permitting long-run adjustments to take place?
The Fed's policy can shorten the adjustment period.
The Fed's policy can reduce unemployment sooner.
The Fed's policy can move the economy to long-run equilibrium sooner.
All of the above.
An economy's aggregate demand curve (the relationship between short-run equilibrium output and inflation) is described by the equation:Y = 15,000 - 12,000π, where π is the inflation rate. Initially, the inflation rate is 2 percent or π = 0.02. Potential output Yp equals 14,640.Note: Keep as much precision as possible during your calculations. Your final answer for inflation should be accurate to at least two decimal places and output should be accurate to the nearest whole number.a) Find inflation and output in short-run equilibrium.
Inflation : 0%Output : $0
b) Find inflation and output in long-run equilibrium.
Inflation : 0%Output : $0
Chapter 16 Solutions
Macroeconomics
Ch. 16.2 - Prob. 1STCh. 16.2 - Prob. 2STCh. 16.2 - Prob. 3STCh. 16.3 - Prob. 1STCh. 16.3 - Prob. 2STCh. 16.3 - Prob. 3STCh. 16.5 - Prob. 1STCh. 16.5 - Prob. 2STCh. 16 - Prob. 1QPCh. 16 - Prob. 2QP
Ch. 16 - Prob. 3QPCh. 16 - Prob. 4QPCh. 16 - Prob. 5QPCh. 16 - Prob. 6QPCh. 16 - Prob. 7QPCh. 16 - Prob. 8QPCh. 16 - Prob. 9QPCh. 16 - Prob. 10QPCh. 16 - Prob. 11QPCh. 16 - Prob. 12QPCh. 16 - Prob. 13QPCh. 16 - Prob. 14QPCh. 16 - Prob. 15QPCh. 16 - Prob. 1WNGCh. 16 - Prob. 2WNGCh. 16 - Prob. 3WNGCh. 16 - Prob. 4WNGCh. 16 - Prob. 5WNG
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- In response to the Great Recession, the Federal Reserve had to take drastic and largely untested measures to stabilize both the financial system and macroeconomy. These measures caused the monetary base to increase from approximately $850 billion to over $4 trillion. Indicate whether each school of macroeconomic thought—classical, Keynesian, monetarist, real business cycle, and secular stagnationist—would support the Fed’s actions.arrow_forwardWhat policy actions should the Fed take, acting from a Keynesian viewpoint, with inflation and unemployment is inversely related, to move up the Phillips Curve in a recessionary economy and decrease unemployment? increase taxes sell securities in the OMO (Open Market Operations) O buy securities in the Open Market Operations (OMO)arrow_forwardConsider an economy that is initially in its long-run equilibrium. Suppose this economy suffers a temporary negative supply shock. If the central bank’s sole objective is to stabilize output in the short-run, then what will happen after the central bank has responded according to its objective? A. Inflation will be lower, output will back at its original level B. Inflation will be lower, output will be lower C. Inflation will be higher, output will be higher D. Inflation will be lower, output will be higher E. Inflation will be higher, output will be lower F. Inflation will be higher, output will back at its original levelarrow_forward
- Suppose the economy is experiencing inflation. If the Federal Reserve enacts contractionary monetary policy, interest rates will likely Multiple Choice rise causing prices to decrease. fall causing prices to increase. fall causing prices to decrease. rise causing prices to increasearrow_forwardWhich of the following are reasons why the Fed targets an inflation rate greater than 0%? Inflation enables the labor market to function more smoothly. enables the Fed to more effectively fight recessions. helps avoid the risk of deflation. at 0% keeps the purchasing power of consumers stable.arrow_forwardtrue or false Suppose that the central bank lost credibility in the sense that people no longer believe its inflation target (that is, inflation expectations are not `anchored’). In this case, both short-run output and long-run output do not increase in response to a permanently higher inflation target.arrow_forward
- It is time to take control of the Federal Reserve, which controls the U.S. money supply (M). In this chapter, we are thinking only about the “long run,” so real GDP (Y ) is out of the Fed’s control, as is velocity (v). The Fed’s only goal is to make sure that the price level (P) is equal to 100 each and every year. That is just known as “price stability,” one of the main goals of most governments. Fill in the missing values of M for the table. Year M v = P Y 1 25,000 2 100 500 2 4 100 500 3 4 100 400 4 4 100 200 5 2 100 400 6 1 100 600 Year 2, M = Year 3, M = Year 4, M = Year 5, M = Year 6, M =arrow_forwardExplain the impact effect of this shock on output, inflation, and the real interest rate. Explain the dynamic response of output, inflation, and interest rates in subsequent periods. Does the economy converge back to the same long-run equilibrium? Explain how the central bank responds to inflation and the importance of the monetary authority following the Taylor principle. How would your answer to (B) change if the shock lasted for several periods (instead of one period) before reverting to zero?arrow_forwardWhen the Fed buys bonds (or bond options) on a larger scale (than before) from private banks, ceteris paribus Group of answer choices A) the money supply tends not to change. B) it tends to cause deflation. C) the money supply tends to decrease. D) aggregate demand tends to shift left. E) the money supply tends to increase.arrow_forward
- If the Fed indicates that inflation is likely to be a concern in the near future, the public would expect that it might Lower interest rates at its next meeting Not change interest rates at its next meeting Raise interest rates at its next meeting Lower interest rates before its next meeting Decrease the federal budget deficit at its next meetingarrow_forwardDraw the short-run trade-off between inflation and unemployment. How might the Fed move the economy from one point on this curve to another?arrow_forwardPRICE LEVEL Show the long-run effect of this change according to the monetarist view, ceteris paribus, by dragging one or both curves on the graph below. (?) REAL GDP AD SRAS AD SRASarrow_forward
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