The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

Chapter 23

Monetary Policy Theory - all with Video Answers

Educators

Chapter Questions

Problem 1

What does it mean for the inflation gap to be negative?

Tanner Fonjweng

Tanner Fonjweng

Numerade Educator

Problem 2

"If autonomous spending falls, the central bank should lower its inflation target in order to stabilize inflation." Is this statement true, false, or uncertain? Explain your answer.

Sandile Ndlovu

Numerade Educator

Problem 3

For each of the following shocks, describe how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a longrun equilibrium.
a. Consumers reduce autonomous consumption.
b. Financial frictions decrease.
c. Government spending increases.
d. Taxes increase.
e. The domestic currency appreciates.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 4

During the global financial crisis, how was the Fed able to help offset the sharp increase in financial frictions, without the ability to lower interest rates further? Did it work?

Sandile Ndlovu

Numerade Educator

Problem 5

Why does the divine coincidence simplify the job of policy making?

Tanner Fonjweng

Tanner Fonjweng

Numerade Educator

Problem 6

Why do negative supply shocks pose a dilemma for policymakers?

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 7

In what way is a permanent negative supply shock worse than a temporary negative supply shock?

Sandile Ndlovu

Numerade Educator

Problem 8

Suppose three economies are hit with the same negative supply shock. In country $A,$ inflation initially rises and output falls; then inflation rises more and output increases. In country $\mathrm{B}$, inflation initially rises and output falls; then both inflation and output fall. In country $\mathrm{C},$ inflation initially rises and output falls; then inflation falls and output eventually increases. What type of stabilization approach did each country take?

Sandile Ndlovu

Numerade Educator

Problem 9

"Policymakers would never respond by stabilizing a temporary positive supply shock." Is this statement true, false, or uncertain? Explain your answer.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 10

The fact that it takes a long time for firms to bring new plant and equipment on line is an illustration of the concept related to what policy problem?

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 11

If someone told you, "Congress and the Senate couldn't vote themselves out of a phone booth," what type of policy lag are they referring to?

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 12

Is stabilization policy more likely to be conducted with monetary policy or fiscal policy? Why?

Sandile Ndlovu

Numerade Educator

Problem 13

"If the data and recognition lags could be reduced, activist policy would more likely be beneficial to the economy." Is this statement true, false, or uncertain? Explain your answer.

Tanner Fonjweng

Tanner Fonjweng

Numerade Educator

Problem 14

Why do activists believe the economy's self-correcting mechanism is slow?

Tanner Fonjweng

Tanner Fonjweng

Numerade Educator

Problem 15

If the economy's self-correcting mechanism works slowly, should the government necessarily pursue discretionary policy to eliminate unemployment? Why or why not?

Sandile Ndlovu

Numerade Educator

Problem 16

Suppose one could measure the welfare gains derived from eliminating output (and unemployment) fluctuations in the economy. Assuming these gains are relatively small for the average individual, how do you think this conclusion would affect the activist/nonactivist debate?

Sandile Ndlovu

Numerade Educator

Problem 17

Given a relatively steep and a relatively flat short-run aggregate supply curve, which one supports the case for nonactivist policy? Why?

Sandile Ndlovu

Numerade Educator

Problem 18

"Because government policymakers do not consider inflation desirable, their policies cannot be the source of inflation." Is this statement true, false, or uncertain? Explain your answer.

Crystal Wang

Numerade Educator

Problem 19

How can monetary authorities target any inflation rate they want to?

Sandile Ndlovu

Numerade Educator

Problem 20

What will happen if policymakers erroneously believe that the natural rate of unemployment is $7 \%$, when it is actually $5 \%$, and pursue stabilization policy?

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 21

How can demand-pull inflation lead to cost-push inflation?

Sandile Ndlovu

Numerade Educator

Problem 22

Suppose the current administration decides to decrease government expenditures as a means to cut the existing government budget deficit.
a. Using a graph of aggregate demand and supply, show what the effect would be in the short run. Describe the effects on inflation and output.
b. What would be the effect on the real interest rate, inflation rate, and output level if the Federal Reserve decides to stabilize the inflation rate?

Sandile Ndlovu

Numerade Educator

Problem 23

Use a graph of aggregate demand and supply to demonstrate how lags in the policy process can result in undesirable fluctuations in output and inflation.

Nick Johnson

Numerade Educator

Problem 24

As monetary policymakers care more about inflation stabilization, the slope of the aggregate demand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curve help stabilize inflation when the economy is hit with a temporary negative supply shock? How does this affect output? Use a graph of aggregate demand and supply to demonstrate.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 25

Many developing countries suffer from graft and endemic corruption, How does this help explain why these economies have typically high inflation and economic stagnation? Use a graph of aggregate demand and supply to demonstrate.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator