Questions and Answers of Economics Today The Macro View

1.10 “Even if some people do not form their expectations rationally, this does not necessarily mean that the new classical theory is of no value.” Discuss.
1.5 Suppose a short-run tradeoff between inflation and unemployment currently exists. How would you expect this tradeoff to be affected by a change in technology that permits the wider dispersion of
1.3 Why does the new classical theory have the word classical associated with it? Also, why has it been said that the classical theory failed where the new classical theory succeeds, as the former
1.2 It has been said that the policy ineffectiveness proposition(connected with new classical theory) does not eliminate policymakers’ ability to reduce unemployment through aggregate
1.1 What is a major difference between adaptive and rational expectations? Give an example of each.
1.2. How are New Keynesians who believe people hold rational expectations different from new classical economists who believe people hold rational expectations?
1.1. TheWall Street Journal reports that the money supply has recently declined. Is this consistent with a demand-induced or supply-induced business cycle or both? Explain your answer.
1.The assumptions of the New Keynesian theory (rational expectations and some price and wage rigidities) seem more reasonable to me than the assumptions of other theories in this chapter (e.g., the
1.3. If expectations are formed rationally, does it matter whether policy is unanticipated, anticipated correctly, or anticipated incorrectly? Explain your answer.
1.2. When policy is unanticipated, what difference is there between the natural rate theory built on adaptive expectations and the natural rate theory built on rational expectations?
1.1. Does the policy ineffectiveness proposition (PIP) always hold?
1.We are not used to seeing expansionary monetary policy resulting in a decline in Real GDP, which is what Exhibit 7 shows. Isn’t this a very unusual outcome?Usually, we think of expansionary
1.Are new classical economists saying that if people anticipate things correctly, we will get different economic outcomes than if they anticipate things, say, incorrectly in a particular direction?
1.3. The Friedman natural rate theory is sometimes called the “fooling” theory. Who is being fooled and what are they being fooled about?
1.2. Is there a tradeoff between inflation and unemployment? Explain your answer.
1.1. What condition must exist for the Phillips curve to present policymakers with a permanent menu of choices (between inflation and unemployment)?
1.Why is there an inverse relationship between wage inflation and unemployment?
1.• What does each of the events have to do with economics?
1.8 According to the Taylor rule, if inflation is 5 percent, the inflation gap is 3 percent, and the output gap is 2 percent, what does the federal funds rate target equal?
1.7 Graphically portray the monetarist transmission mechanism when the money supply declines.
1.6 Graphically portray the Keynesian transmission mechanism under the following conditions: (a) a decrease in the money supply; (b) no liquidity trap; (c) investment demand curve is downward
1.5 Which panel in the figure to the right best describes the situation in each of (a)–(d)?a Expansionary monetary policy that effectively removes the economy from a recessionary gap b Expansionary
1.4 Graphically show that the more interest insensitive the investment demand curve, the less likely monetary policy is effective at changing Real GDP.
1.3 Suppose the annual average percentage change in Real GDP is 2.3 percent, and the annual average percentage change in velocity is 1.1 percent. Using the monetary rule discussed in the text, what
1.2 Sally bought a bond last year for $10,000 that promises to pay her $1,000 a year. This year, it is possible to buy a bond for $10,000 that promises to pay $800 a year. If Sally wants to sell her
1.1 Bob bought a bond last year for $10,000 that promises to pay him $900 a year. This year, it is possible to buy a bond for $10,000 that promises to pay $1,000 a year. If Bob wants to sell his
1.10 Conduct the following exercise. Pick any week of the year. Quickly read through all the issues of The Wall Street Journal for that week and write down the number of articles in which the word
1.9 How does inflation targeting work?
1.8 Argue the case for and against a monetary rule.
1.6 Both activists and nonactivists make good points for their respective positions. Do you think there is anything an activist could say to a nonactivist to convince him or her to accept the
1.5 Suppose it were proved that there is no liquidity trap and investment is not interest insensitive.Would this be enough to disprove the Keynesian claim that expansionary monetary policy is not
1.2 If bond prices fall, will individuals want to hold more or less money? Explain your answer.
1.How can expansionary monetary policy not increase Real GDP in the short run?
1.Is Quentin right? Should he buy bonds when interest rates are headed down and sell bonds when they are headed up?
1.Why doesn’t Karen carry more cash?
1.Melanie agrees that “you can never have enough money,”but she acts differently. How so?
1.2. What is the inflationary gap? the output gap?
1.1. Would a rules-based monetary policy produce price stability?
1.3. If the economy is stuck in a recessionary gap, does this make the case for activist (expansionary) monetary policy stronger or weaker? Explain your answer.
1.2. How might monetary policy destabilize the economy?
1.1. Why are Keynesians more likely to advocate expansionary monetary policy to eliminate a recessionary gap than contractionary monetary policy to eliminate an inflationary gap?
1.Economics would be much easier if all economists agreed on how the economy works and what should be done given a certain problem in the economy. Please comment.
1.3. Explain how the monetarist transmission mechanism works when the money supply rises.
1.2. “According to the Keynesian transmission mechanism, as the money supply rises, there is a direct impact on the goods and services market.” Do you agree or disagree with this
1.1. Explain the inverse relationship between bond prices and interest rates.
1.I want to make sure I have this correct. According to the Keynesian transmission mechanism, an increase in the money supply will lower the interest rate, which will then stimulate more investment
1.At i2 in Exhibit 2, there is an excess supply of money; there is “too much”money. But what does it mean to say an individual has “too much” money? Isn’t it the case that you can never
1.• How can expansionary monetary policy not increase Real GDP in the short run?
1.• Is Quentin right? Should he buy bonds when interest rates are headed down and sell bonds when they are headed up?
1.• Why doesn’t Karen carry more cash?
1.• Melanie agrees that “you can never have enough money,”but she acts differently. How so?
1.3 Use the figure below to answer the following questions.a The economy is at point A when there is a oneshot demand-induced inflation. Assuming no other changes in the economy, at what point will
1.2 Graphically show each of the following:a Continued inflation due to supply-side factors b One-shot demand-induced inflation c One-shot supply-induced inflation
1.1 How will things change in the AD-AS framework if a change in the money supply is completely offset by a change in velocity?
1.13 Suppose the money supply increased 30 days ago.Whether the nominal interest rate is higher, lower, or the same today as it was 30 days ago depends on what?Explain your answer.
1.12 The money supply rises on Tuesday and by Thursday the interest rate has risen. Is this more likely the result of the income effect or the expectations effect? Explain your answer.
1.11 To a potential borrower, which would be more important—the nominal interest rate or the real interest rate?Explain your answer.
1.10 In recent years, economists have argued about what the true value of the real interest rate is at any one time and over time. Given that the Nominal interest rate Real interest rate Expected
1.9 Explain how demand-induced one-shot inflation may appear as supply-induced one-shot inflation.
1.8 “One-shot inflation may be a demand-side (of the economy) or a supply-side phenomenon, but continued inflation is likely to be a demand-side phenomenon.”Do you agree or disagree with this
1.7 What is the difference in the long run between a oneshot increase in aggregate demand and a one-shot decrease in short-run aggregate supply?
1.6 “A loaf of bread, a computer, and automobile tires have gone up in price; therefore, we are experiencing inflation.”Do you agree or disagree with this statement?Explain your answer.
1.5 Suppose the objective of the Fed is to increase Real GDP.To this end, it increases the money supply. Is there anything that can offset the increase in the money supply so that Real GDP does not
1.4 In monetarism, how will each of the following affect the price level in the short run?a An increase in velocity b A decrease in velocity c An increase in the money supply d A decrease in the
1.3 In the simple quantity theory of money, what will lead to an increase in aggregate demand? In monetarism, what will lead to an increase in aggregate demand?
1.2 In the simple quantity theory of money, the AS curve is vertical. Explain why.
1.1 What are the assumptions and predictions of the simple quantity theory of money? Does the simple quantity theory of money predict well?
1.If the Fed does what Sebastian thinks it will do, will his brother, Jim, have a better chance of finding a job?
1.If the Fed wants to lower interest rates, are interest rates destined to go down? In short, can the Fed do what it wants to do?
1.Jan believes that she will end up paying more for her remodeling because her contractor’s costs went up. Odd as it may sound, could Jan be the reason her contractor’s costs went up?
1.Is it correct to say that one-shot inflation can originate on either the demand side or supply side of the economy?
1.3. The Fed only affects the interest rate via the liquidity effect. Do you agree or disagree?Explain your answer.
1.2. Is it possible for the nominal interest rate to immediately rise following an increase in the money supply? Explain your answer.
1.1. If the expected inflation rate is 4 percent and the nominal interest rate is 7 percent, what is the real interest rate?
1.3. What type of inflation is Milton Friedman referring to when he says that “inflation is always and everywhere a monetary phenomenon”?
1.2. Is continued inflation likely to be supply-side induced? Explain your answer.
1.1. The prices of houses, cars, and television sets have increased. Has there been inflation?
1.2. Can a change in velocity offset a change in the money supply (on aggregate demand)?Explain your answer.
1.1. What do monetarists predict will happen in the short run and in the long run as a result of each of the following (in each case, assume the economy is currently in long-run equilibrium)?a.
1.3. Predict what will happen to the AD curve as a result of each of the following:a. The money supply rises.b. Velocity falls.c. The money supply rises by a greater percentage than velocity falls.d.
1.2. What is the difference between the equation of exchange and the simple quantity theory of money?
1.1. IfM times V increases, why does P times Q have to rise?
1.If the AS curve is vertical, then an increase in the money supply will shift the AD curve rightward, but this won’t change Real GDP, although it will raise the price level, P. Is this correct?
1.In an earlier chapter, we learned that if AD rises, both P and Q will rise in the short run. Does that happen here too?
1.Can a given money supply, say, $1.2 trillion, end up supporting various GDP levels?
1.• If the Fed does what Sebastian thinks it will do, will his brother, Jim, have a better chance of finding a job?
1.• If the Fed wants to lower interest rates, are interest rates destined to go down? In short, can the Fed do what it wants to do?
1.• Jan believes that she will end up paying more for her remodeling because her contractor’s costs went up. Odd as it may sound, could Jan be the reason her contractor’s costs went up?
1.4 Complete the following table: Federal Reserve Action Effect on the Money Supply (up or down?) Lower the discount rate Conduct open market purchase Lower required reserve ratio Raise the discount
1.3 If the federal funds rate is 6 percent and the discount rate is 5.1 percent, to whom will a bank be more likely to go for a loan—another bank or the Fed? Explain your answer.
1.2 If reserves increase by $2 million and the required reserves ratio is 10 percent, then what is the maximum change in checkable deposits?
1.1 If reserves increase by $2 million and the required reserve ratio is 8 percent, then what is the maximum change in checkable deposits?
1.11 What does it mean to say the Fed serves as the lender of last resort?
1.10 The Fed can change the discount rate directly and the federal funds rate indirectly. Explain.
1.9 Explain how a check is cleared through the Federal Reserve System.
1.8 Suppose you read in the newspaper that all last week the Fed conducted open market purchases and that on Tuesday of last week it lowered the discount rate.What would you say the Fed was trying to
1.7 Explain how a decrease in the required reserve ratio increases the money supply.
1.6 Suppose bank A borrows reserves from bank B. Now that bank A has more reserves than previously, will the money supply increase?
1.5 Suppose the Fed raises the required reserve ratio, a move that is normally thought to reduce the money supply. However, banks find themselves with a reserve deficiency after the required reserve
1.4 Explain how an open market sale decreases the money supply.

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