Suppose a central bank that has an inflation targeting mandate. (a) Explain why such a mandate...

Suppose a central bank that has an inflation targeting mandate.

(a) Explain why such a mandate might lead to monetary policy becoming a stabilizing policy regarding real GDP. [Hint: Use an AD-AS diagram.] [5]

(b) Given the long and variable lags involved in the full effects of monetary policy being felt throughout the economy, is there any danger that the inflation mandate might turn out to be destabilizing (leading to wider swings in GDP)? Explain. [5]

Expert Solution

Rahul Sunny answered 4 months ago

Suppose a central bank that has an inflation targeting mandate. a. Explain why such a mandate...

Suppose a central bank that has an inflation targeting mandate. a. Explain why such a mandate might lead to monetary policy becoming a stabilizing policy regarding real GDP. [Hint: Use an AD-AS diagram.] b. Given the long and variable lags involved in the full effects of monetary policy being felt throughout the economy, is there any danger that the inflation mandate might turn out to be destabilizing (leading to wider swings in GDP)? Explain.

2. A central bank has decided to adopt inflation targeting and is now debating whether to...

2. A central bank has decided to adopt inflation targeting and is now debating whether to target 5 percent inflation or zero inflation. The economy is described 3 by the following Phillips curve: u = 6 − 0.5(π − E π), where u and π are the unemployment rate and inflation rate measured in percentage points. The social cost of unemployment and inflation is described by the following loss function: L = u + 0.025π 2 The central bank would...

Imagine that the central bank has dual mandate. Suppose that a temporary negative supply shock hits...

Imagine that the central bank has dual mandate. Suppose that a temporary negative supply shock hits the economy. What is an example of a temporary negative supply shock? (1 mark) If the central bank does nothing, what happens to output and inflation in both the short run and the long run? Illustrate using a diagram. c) What is the difficult choice faced by the central bank when there is a temporary negative supply shock? (1 mark) d) If the central...

Suppose that the central bank in this economy is concerned that inflation is too high and...

Suppose that the central bank in this economy is concerned that inflation is too high and wants to lower the inflation rate by 6 percentage points per year. A reduction in the rate of inflation is known as d sinflation . To reduce inflation from 8% to 2% in the short run, the central bank would have to accept an unemployment rate of ____________ . True or False: If people have rational expectations, the economy may not have to endure...

Suppose the current inflation rate is higher that the target inflation rate. Would the Central bank...

Suppose the current inflation rate is higher that the target inflation rate. Would the Central bank increase or decrease the interest rate? In your answer, explain how the Central bank makes this decision and explain the steps involved in changing the interest rate.

Suppose the current inflation rate is higher that the target inflation rate. Would the Central bank...

Suppose the current inflation rate is higher that the target inflation rate. Would the Central bank increase or decrease the interest rate? In your answer, explain how the Central bank makes this decision and explain the steps involved in changing the interest rate.

Suppose an economy has been having very high inflation. The central bank has decided to decrease...

Suppose an economy has been having very high inflation. The central bank has decided to decrease the money supply in hopes of decreasing GDP (the thinking is that by decreasing GDP, it will lead to lower inflation – no need to make that connection, just focus on the goal of decreasing GDP). Using the complete Keynesian model, explain in as much detail as possible what will likely happen to the economy (including GDP, the interest rate, investment spending, any multiplier...

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Suppose a central bank that has an inflation targeting mandate. (a) Explain why such a mandate...

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