MACROECONOMICS FOR TODAY
10th Edition
ISBN: 9781337613057
Author: Tucker
Publisher: CENGAGE L
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Chapter 17, Problem 11SQ
To determine
The impact of the expansionary monetary and fiscal policies on
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According to rational expectations economists, as a result of an increase in aggregate demand due to an expansionary monetary policy, real output and employment would not increase because said policy would be offset by higher prices and
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The economy in Country X is in a recession, with real gross domestic product (GDP) $100 billion below full-employment output. (a) Draw one correctly labeled graph of the short-run and long-run Phillips curves, labeling the current equilibrium point A. (b) Assume that the government increases spending by $20 billion to stimulate economic activity. Assume that the marginal propensity to save is 0.25. Calculate the maximum total change in real GDP that could occur following the $20 billion increase in government spending. (c) On your graph in part (a), label the new equilibrium point B as a result of the increase in government spending. (d) Had the government lowered personal income taxes by $20 billion instead of increasing spending by $20 billion, would the maximum total change in real GDP be greater than, smaller than, or the same as the one calculated in part (b) ? Explain.
Discuss whether it is possible for policymakers to trade off more inflation for higher output in the short run and the long run. Explain from the new classical and new Keynesian perspective.
Chapter 17 Solutions
MACROECONOMICS FOR TODAY
Ch. 17.3 - Prob. 1YTECh. 17.6 - Prob. 1YTECh. 17 - Prob. 1SQPCh. 17 - Prob. 2SQPCh. 17 - Prob. 3SQPCh. 17 - Prob. 4SQPCh. 17 - Prob. 5SQPCh. 17 - Prob. 6SQPCh. 17 - Prob. 7SQPCh. 17 - Prob. 8SQP
Ch. 17 - Prob. 9SQPCh. 17 - Prob. 1SQCh. 17 - Prob. 2SQCh. 17 - Prob. 3SQCh. 17 - Prob. 4SQCh. 17 - Prob. 5SQCh. 17 - Prob. 6SQCh. 17 - Prob. 7SQCh. 17 - Prob. 8SQCh. 17 - Prob. 9SQCh. 17 - Prob. 10SQCh. 17 - Prob. 11SQCh. 17 - Prob. 12SQCh. 17 - Prob. 13SQCh. 17 - Prob. 14SQCh. 17 - Prob. 15SQCh. 17 - Prob. 16SQCh. 17 - Prob. 17SQCh. 17 - Prob. 18SQCh. 17 - Prob. 19SQCh. 17 - Prob. 20SQ
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- a) Consider an AD-AS model with Static Expectations. Show how changes in monetary policy generate short-run movements in output. (b) Consider an AD-AS model with Rational Expectations. Show how changes in the unanticipated component of monetary policy generate short-run movements in output. (c) Explain how overlapping wage contracts generate persistence in output when there are monetary policy shocks.arrow_forwardCompared to the Adaptive Expectations Theory, the Rational Expectations Theory A) asserts the same conclusions about policy activism.B) implies that policy activism is less effectiveC) implies that policy activism is more effective.D) asserts that people cannot anticipate the effects of policies in advance.E) the inflation arising from an expansionary policy will be less.arrow_forwardLucas's critique, based on rational expectations, argues that it is not enough to use econometric models to evaluate policy. In this regard, explain the comparison of the new classical macroeconomic model, the new Keynesian model and the traditional model on the impact of rational expectations on the aggregate economy!arrow_forward
- According to the rational-expectations approach, if everyone believes that policymakers are committed to reducing inflation, the cost of reducing inflation—the sacrifice ratio—will be lower than if the public is skeptical about the policymakers’ intentions. Why might this be true? How might credibility be achieved?arrow_forwardAccording to the rational-expectations approach, if everyone believes that policymakers are committed to reducing inflation, the cost of reducing inflation—the sacrifice ratio—will be lower than if the public is skeptical about the policymakers’ intentions.Why might this be true? How might credibility be achieved?arrow_forwardSuppose you are the president of a hypothetical economy. You have to fix healthcare and run the automobile industry . But Swine flu is breaking all over. a) We know that the economy also suffers from sour expectations about future productivity. Represent in a neatly drawn ISLM figure that, all else equal, those expectations, in conjunction with the flu outbreak described in part A above, could result in a decline in GDP and a decline in real interest rates without any change in the price level. b) Why do prices not rise in the scenario described in part A?arrow_forward
- According to the pure expectations theory, the short term rates will exceed long term rates whenever market participants expect short term rates to increase in the future. True/False?arrow_forwardPlease note I only need help with Part 4 and 5. I have answers for the other parts. Thank you so much for your time and effort! Figure 2: Keynes’s AD-AS Model (Image normally goes here) Part 1:Changes in which factors could cause aggregate demand to shift from AD to AD1? What could happen to the unemployment rate? What could happen to the inflation rate? Part 2: The Keynesian AD-AS model describes what happens with price levels when aggregate demand increases. Could you find any evidence from the last ten-fifteen years that might support AD-AS model descriptions of demand-pull inflation, cost-push inflation, and recession? For example, you could find data on the GDP’s of any two countries from 2000 to 2017 to support your findings. Please note the followong for the next 3 parts of this. In macroeconomics, the immediate short run is known as a length of time when both input prices and output prices are fixed. In the short-run, input prices are fixed but output prices are variable. In…arrow_forwardWhich of the following best describes the concept of 'rational expectations' in the context of macroeconomic theory?a) The hypothesis that consumers and firms expect future inflation to match past inflation rates without considering current economic policies.b) The idea that individuals and firms make forecasts of future economic variables based solely on historical data, ignoring all current available information.c) The theory that individuals and firms use all available information, including current and historical data, to make accurate predictions about future economic variables.d) The assumption that individuals and firms consistently underestimate the impact of monetary and fiscal policies on the economy due to a lack of available information.Please don't use ai please provide valuable answer otherwise be ready for disupvotearrow_forward
- The rational expectations assumption is unrealistic because, essentially, it amounts to the assumption that every consumer has perfect knowledge of the economy.” Discuss in the context of developing countries.arrow_forwardWhich perspective is better suited to handling the inflation we face today? Keynesian or Neoclassical? Explain why.arrow_forwardare anti-inflationary policies effective when there are adverse supply shocks? which monetary or fiscal policy would be more effective?arrow_forward
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