Question

TRUE OR FALSE

a) If output is less than potential output, unemployment will encourage workers to accept smaller raises, which brings inflation below expected inflation. Eventually, expected inflation will fall, which allows firms to lower the inflation rate. As the real money supply rises, investment and output rise. The process continues until the economy is in medium-run equilibrium.

b) It is easier to stabilize the economy if expectations remain anchored.

c)It is easier for central banks to stabilize the economy when faced with a supply shock, compared to a demand shock. This is true whether inflation expectations are anchored or unanchored.

d) Suppose the economy is experiencing an expansionary gap. Allowing the economy to self-adjust (back to potential output) may cause expectations of inflation to lose their anchor.

Answer 1

a.False

This is a situation of a continued recession. in this casue the governement usually intervenes to add excess cash to to economy.

b. True

An eonomy with a predictable expectatiosnn is easier to stabilize.

c. True

The demand shocks are more difficult to combat especially, the decrease of demand.

d. True

When a economy wants to come back to potential output from an expansionary gap, the economy may lose achor of inflation.

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