Economics (7th Edition) (What's New in Economics)
Economics (7th Edition) (What's New in Economics)
7th Edition
ISBN: 9780134738321
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 28, Problem 28.3.1RQ
To determine

The future expectations of workers, firms and investors.

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If the U.S. Fed announces to raise the interest rate (i.e. discount rate) by 1% by the end of 2021, what do you expect the impact on the current U.S. inflation? Please explain briefly in the language of macroeconomics.
In the Financial Times article “UK businesses expect prices to soar in the coming year” (3 March 2022) we can read: “British businesses expect inflation to rise at its fastest pace for five years, according to a Bank of England survey, […] the Bank of England has often quoted high business inflation expectations […] in recent months to support the need for further monetary policy tightening.” (a) Explain why the central bank considers business expectations when making decisions on monetary policy. (100 words) (b) In February 2022, inflation in the UK was expected to increase to close to 6% in February and March, before peaking at around 7 ¼% in April. Despite this, the Monetary Policy Committee in the Bank of England increase the policy rate to 0.25% to 0.5%, even if some members recommended an increase to 0.75%.  Using the 3-equation model, depict the UK economy in February 2022, and provide some reasons why the Bank of England did not increase the interest rate to 0.75% (or higher).…
Economists sometimes argue that moderate inflation may help the economy by making wages in labor markets more       ["", "", ""]  . The discussion in the text pointed out that wages tend to be sticky in their downward movements and that unemployment can result. A little inflation could nibble away at       ["", ""]  wages, and thus help real wages to       ["", ""]  if necessary. In this way, even if a moderate or high rate of inflation may act as sand in the gears of the economy, perhaps a low rate of inflation serves as oil for the gears of the labor market. This argument is controversial. A full analysis would have to account for all the effects of inflation. It does, however, offer another reason to believe that, all things considered, very low rates of inflation may not be especially harmful.
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