1. An aggressive union will shift the aggregate supply curve_________, causing prices to and real GDP to ________.
2. In the face of an upward shift in the aggregate supply curve, the Fed can increase the supply of money. This will prevent a recession, but will cause an increase in _________.
3. The evidence shows that lower inflation rates are associated with central bank _________.
4. When the Bank of England became independent, inflation expectations ___________.
5. Public Pronouncements and Fed Officials. In addition to political and institutional factors, public pronouncements also affect the credibility of the Fed. When Alan Blinder, a Princeton University professor of economics, was appointed vice-chair of the Federal Reserve in 1994, he gave a speech to a group of central bankers and monetary policy specialists. In that speech, he repeated one of the lessons in this chapter: In the long run, the rate of inflation is independent of unemployment and depends only on money growth; in the short run, lower unemployment can raise the inflation rate. Blinder s speech caused an up roar in the financial press. Some commentators attacked him as not being sufficiently vigilant against inflation. Use the idea of credibility to explain why an apparently innocent speech would create such a reaction.
6. Pay Incentives for Fed Officials? In the private sector, the pay of executives is typically tied to the performance of their company. Could this work in the public sector as well? Suppose pay for the chairman of the Federal Reserve is tied to the price of long-term bonds. That is, if bond prices rise, the chairman receives a bonus, but if they fall, the chairman s salary will decrease. Would this provide a credible incentive for the chairman to keep inflation low? Do you see any disadvantages to this proposal?
7. Buying Gold to Protect Against Inflation. Consider the following statement: Since gold is a commodity and prices of commodities by definition increase with inflation, buying gold will protect me from any inflationary increases. Can you point out a possible problem with buying gold to protect yourself against inflation?