Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 35, Problem 5PA
To determine
The response of inflation to new policies.
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Students have asked these similar questions
What did Friedman and Phelps argue about the effectiveness of monetary policies?
As long as people’s inflation expectations were fixed, an increase in the money supply growth rate could not change output in the short or long run.
If people’s inflation expectations were fixed, in the short run, a decrease in the money supply growth rate could raise output and unemployment.
When the money supply growth rate changed, people would eventually revise their inflation expectations so that any change in unemployment created by an increase in the money supply growth rate would be temporary.
When the money supply growth rate changes, people slowly adjust their inflation expectations; therefore, the unemployment rate changes only in the long run but not in the short run.
Monetary policy set with discretion is said to feature an inflation bias because commitment to a rule could achieve lower inflation at no cost in terms of higher unemployment. True or False? Explain.
The Bank of England will prevent members of its interest rate-setting committee from publishing individual opinions on the economy despite a review of its procedures calling for greater transparency. The Bank said a "collective forecast" will remain the centerpiece of the monetary policy committee's monthly reports, effectively barring members from explaining their own views on the likely path of economic growth, inflation, and unemployment. Critics of the Bank's policy said the Bank's governor, Sir Mervyn King, had rejected proposals for the public to see a wider range of views because he wanted to maintain a stranglehold on the direction of policy...In response, the Bank said it agreed some procedures were opaque and there was a need for clear lines of responsibility, but said that criticism of the monetary policy committee, which King chairs, were largely unfounded.
Explain why then-Bank of England Governor Mervyn King would want to prevent members of the monetary policy committee…
Chapter 35 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- Central banks should target inflation within a wider band, say 1-4% or even 1-5%, to avoid unnecessary long lasting tightness of Monetary policy.” State True or False and justify your answerarrow_forwardIf the economy has rational expectations and the model is sticky price model. Could you explain why the following statement true in macroeconomics?arrow_forwardThe "rational expectations" school of economists, including Robert Lucas and Thomas Sargent, argue that changes in monetary policy cannot affect unemployment rates in the short run or long run. True Falsearrow_forward
- Does the effectiveness of monetary policy depend on inflationexpectations? Explainarrow_forwardThe effect of monetary inflation on interest rates would be: to cause rates to initially fall, but as prices rise, interest rates will also rise. to cause rates to initially rise, but as prices fall, interest rates will also fall. to cause rates to initially fall, and as prices rise, interest rates will also fall much more rapidly. to cause rates to initially fall, and as prices rise, interest rates will stay the same.arrow_forwardIn the simple monetary policy rule considered in Chapter 13, what role does the parameter m_bar (letter “m” with a short bar above it) play? It stands for the rate of inflation It tells us how unemployment changes when output changes It governs how aggressively monetary policy responds to inflation None of the above (i.e., something else)arrow_forward
- The most common definition that monetary policymakers use for price stability is Question 15 options: a) low and stable deflation. b) an inflation rate of zero percent. c) low and stable inflation. d) high and stable inflation.arrow_forwardThe United States Federal Reserve has two mandates when setting monetary policy - keep annual inflation low (around 2-3%) and the unemployment rate low (around 5%). Typically, efforts to adjust the money supply to cause inflation to decrease causes unemployment to increase and vice versa. Now, imagine a situation where the United States faces high inflation and high unemployment (called stagflation, was issue in late 1970s). What do you think the Federal Reserve should do in this situation?arrow_forwardWhat Can the Fed Do about Inflation? In the article by Thomas Hogan, we learn that Russia's invasion of the Ukraine nor the shortage or supply chain issues has not derived the main causes of inflation. (Hogan, 2022) The main cause for the issues that we have been facing come directly from the constant price changes and the monetary policy that is currently in place. We learn that with Federal Open Market Committee (FOMC) has not adjusted their monetary policy, and have been raising the rates in such small increments that is causing the inflation to continue in an upward trend. What needs to occur is the FOMC needs to raise interest rates in greater scales in order the combat the inflation that is taking place and stabilize the price levels that are out there. (Hogan, 2022) What needs occur is that the Fed needs to come up with a policy that will allow for a predetermined path that slows down and regulating the money growth back to a safe place. Having the guidance from the article…arrow_forward
- The inflation rate is 12 percent, and the central bank is considering slowing the rate of money growth to reduce inflation to 8 percent. Economist Carlos believes that expectations of inflation change quickly in response to new policies, whereas economist Felix believes that expectations are very sluggish. 1. True or False: Economist Felix is more likely to favor using contractionary policy to reduce inflation than economist Carlos.arrow_forwardWhich describes the difference between the Taylor rule and inflation targeting? A) The Taylor rule responds to past inflation, and inflation targeting is based on a forecast of inflation. B) The Federal Reserve uses inflation targeting, and the Bank of England uses the Taylor rule. C) Inflation targeting responds to past inflation, and the Taylor rule is based on a forecast of inflation. D) Inflation targeting is a strategy used in conducting fiscal policy, while the Taylor rule is used in monetary policy.arrow_forwardThis month, Inflation in Turkey reached nearly 20%. The central bank's repeated interest-rate cuts seem to have added to inflationary pressures in Turkey. Thursday's rate cut was the third in three months and came after the president fired a series of senior officials who opposed his unorthodox economic vision. Apply your theoretical knowledge to explain how monetary policy has caused the surge in inflation.arrow_forward
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