Principles of Economics (MindTap Course List)
8th Edition
ISBN: 9781305585126
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 35, Problem 5CQQ
To determine
Reason for changes in inflation and unemployment .
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If a bank expects inflation to increase in the near future, how will it respond?
It will start paying less interest on deposits.
It will seek to reduce the amount of cash held in its vaults.
It will temporarily scale back its efforts to gain new customers.
It will start charging more interest on loans.
It will temporarily suspend withdrawals.
Explain why a sudden, large burst of inflation could lead to a recession?
Describe the fiscal and monetary measures that are normally taken to curb inflation.
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- Discuss the short-run tradeoff between inflation and unemployment.arrow_forwardIn the graph you've just made, what is the unemployment rate and the inflation rate if the Fed overstimulates but the expected inflation rate remains at 2 percent? The unemployment rate _______ percent and the inflation rate _______ percent. A. decreases to 4; rises to 3 B. remains at 8; remains at 1 C. decreases to 5; rises to 4 D. decreases to 5; rises to 2arrow_forwardAnna Graham is the new Treasury Secretary, and she is trying to interpret some inflation measures. In year one, the aggregate price level increased by 11% and in year two, the aggregate price level decreased by 1%. Which statement accurately characterizes the changes in the nation's price level? In year one, the economy is experiencing deflation. In year two, the economy is experiencing inflation. In year one, the economy is experiencing inflation. In year two, the economy is also experiencing inflation. In year one, the economy is experiencing inflation. In year two, the economy is experiencing deflation. In year one, the economy is experiencing deflation. In year two, the economy is experiencing disinflation.arrow_forward
- If the economy is in long-term equilibrium and cost of energy for production increases, which of the following is likely to occur? Select one: a. It will lead to demand-pulled inflation and create an expansionary gap. b. It will lead to demand-puled inflation and create a contractionary gap. c. It will lead to cost-pushed inflation and create an expansionary gap. d. It will lead to cost-pushed inflation and create a contractionary gap. e. It will create hyperinflation in the economy, but will not create an economic gap.arrow_forwardFILL IN THE BLANKS Inflation measures the changes in the level of in the economy. Demand-pull inflation is caused by a shift in the aggregate demand curve, while cost-push inflation is caused by a shift of the aggregate supply curve. When the price level is increasing by an extremely high rate, the economy is said to be experiencing . Stagflation occurs when the economy is experiencing high inflation, high unemployment, and low at the same time. To combat inflation, the government can use contractionary monetary policy which will also lead to interest rates. Note, however, that there is a short-run tradeoff between inflation and as illustrated by the Philips Curve. Inflation is stable when the unemployment rate is equal to the rate of unemployment.arrow_forwardWhat's wrong with this way of thinking? "When the government runs a budget deficit, it simply pays its bills by printing more money. As the newly printed money works its way through the economy, it waters down the value of paper money already in circulation. Thus, it takes more money to buy things. Budget deficits are the major cause of inflation."arrow_forward
- Explain the two causes of inflationarrow_forwardWhen an economy approaches full employment, why does demand-pull inflation become a problem? Explain.arrow_forwardOne of the fiscal measures of dealing with inflation is: a. Implement a budget surplus b. Operate a budget deficit c. Increase the rate of interest d. Operate a balance budgetarrow_forward
- Your senators claim that lowering prices would be good for everyone—“Who doesn’t like lower prices, after all?” They tell you they plan to lobby for deflation. Falling prices could lead to a bad situation because:arrow_forwardA central bank pledges to reduce the inflation rate from 10% to 3%. People reduce their inflation expectations to 5%, but the central bank reduces inflation to 3%. What happens to the unemployment rate?arrow_forwardExplain what we can understand by expected inflation, inflation due to an increase in aggregate demand or inflation due to a decrease in aggregate supply.arrow_forward
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