Chapter Questions
Figure 12.1 presents a summary of the short-run model. Explain each step in this diagram.
What is the economic justification for the sticky inflation assumption? What role does this assumption play in the short-run model?
How does a central bank influence economic activity in the short run?
What is the relevance of Milton Friedman's phrase "long and variable lags" to this chapter?
What is the Phillips curve? What role does it play in the short-run model? Explain the role played by each term in the equation for the Phillips curve.
What policy change did Paul Volcker implement, and how did it affect interest rates, output, and inflation over time?
Why do central banks often exercise monetary policy by targeting an interest rate rather than by setting particular levels of the money supply?