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 an unemployment rate as high as predicted by the short-run Phillips curve.

Expert Solution

Rahul Sunny answered 2 years ago

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

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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]

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Suppose the economy is initially at a long-run equilibrium. Then the central bank increases the money...

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Consider an economy that is subject to unexpected IS and LM shocks. Suppose Central Bank has...

Consider an economy that is subject to unexpected IS and LM shocks. Suppose Central Bank has two policy options: it will either keep the interest rate or the nominal money supply constant. For each type of shock, deduce which policy is more successful in reducing the variation in output.

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

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