Chapter Questions
What two variables are related by the aggregate demand $(A D)$ curve? Explain how the behavior of the Fed helps determine the slope of this curve. List and discuss two other factors that lead the curve to have the slope that it does.
State how each of the following affects the $A D$ curve and explain. a. An increase in government purchases.b. A cut in taxes.c. A decline in investment spending by firms.d. A decision by the Fed to lower the real interest rate at each level of inflation.
Why does the overall rate of inflation tend to adjust more slowly than prices of commodities, such as oil or grain?
Discuss the relationship between output gaps and inflation. How is this relationship captured in the aggregate demand-aggregate supply diagram?
Sketch an aggregate demand-aggregate supply diagram depicting an economy away from long-run equilibrium. Indicate the economy's short-run equilibrium point. Discuss how the economy reaches longrun equilibrium over a period of time. Illustrate the process in your diagram.
True or false: The economy's self-correcting tendency makes active use of stabilization policy unnecessary. Explain.
What factors led to increased inflation in the United States in the 1960s and 1970s?
Why, in the absence of public beliefs that the central bank is committed to maintaining low inflation, does an adverse inflation shock pose a particularly difficult dilemma for policymakers?
How does a tight monetary policy, like that conducted by the Volcker Fed in the early 1980 s, affect output, inflation, and the real interest rate in the short run? In the long run?
Most central banks place great value on keeping inflation low and stable. Why do they view this objective as so important?