Money & Banking: Ch 23

Which of the following statements is correct?

All of the above. -If most shocks to the economy are aggregate demand shocks or permanent aggregate supply shocks, then policy that stabilizes inflation will also stabilize economic activity, even in the short run. -If temporary supply shocks are more common, then a central bank must choose between stabilizing inflation and stabilizing output in the short run. -In the long run, there is no conflict between stabilizing inflation and economic activity in response to shocks.

Which of the following is least likely to lead to inflationary monetary policy?

Declining oil prices

The economist who proposed that, "Inflation is always and everywhere a monetary phenomenon" was

Milton Friedman

Which of the following is most likely to lead to inflationary monetary policy?

Rising government budget deficits

Which of the following is most likely to lead to inflationary monetary policy?

Rising unemployment

To say that inflation is a monetary phenomenon seems to beg the question:

Why does inflationary monetary policy occur?

When the economy suffers a temporary negative supply shock, the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to

a large deviation of output from its potential

Demand-pull inflation can result when

a persistent budget deficit is financed by selling bonds to the central bank

When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then

aggregate demand curve shifts leftward

When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run, then

all of the above (aggregate demand curve shifts rightward, output will be at its potential, and inflation rate will be higher)

The nonactivists who opposed the recent fiscal stimulus package argue that

all of the above (fiscal stimulus would take too long to work because of long implementation lags, fiscal stimulus might kick in after the economy had already recovered, and fiscal stimulus could lead to increased volatility in inflation and economic activity)

If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output, then

all of the above (potential output falls, the long-run aggregate supply curve shifts leftward, and the short-run aggregate supply curve shifts upward)

Activists of the policies believe that

all of the above (the self-correcting mechanism through wage and price adjustment is very slow, wages and prices are sticky, and the government needs to pursue active policy to eliminate high unemployment when it develops)

Nonactivists of the policies believe that

all of the above (wages and prices are very flexible, the self-correcting mechanism is very rapid, and government action is unnecessary)

Evidence from the time period 1960-1980 indicates that inflation in the United States resulted from

an employment target that was set too high

When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then

both A and B (aggregate output drops in the short run, and output will return to potential output over time)

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

both A and B (inflation will be higher, and output will be at its potential)

When the economy is hit by a negative demand shock and the central bank does not respond by changing the autonomous component of monetary policy, then

both A and B (inflation will be lower, output will be at its potential)

When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then

both A and C (aggregate demand curve shifts leftward, and output will be at its potential)

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

both B and C (output will be at its potential, and output will be lower)

When the economy is hit by a temporary negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then in the long run

both B and D (output will be at its potential, and inflation will be unchanged)

When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then

both B and D (output will be at its potential, inflation will be unchanged)

If workers believe that government policymakers will increase aggregate demand to avoid a politically unpopular increase in unemployment when workers demand higher wages, then workers will not fear higher unemployment and their wage demands will result in

cost-push inflation

The combination of a successful wage push by workers and the government's commitment to high employment leads to

cost-push inflation

If workers do not believe that policymakers are serious about fighting inflation, they are most likely to push for higher wages, which will ________ aggregate ________ and lead to unemployment or inflation or both, everything else held constant.

decrease; supply

Because policies in the United States were too expansionary from 1965 through 1973, the U.S. suffered

demand-pull inflation

If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment, this can set the stage for a higher rate of money growth and

demand-pull inflation.

Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output.

demand; more

If aggregate output is below the natural rate level, nonactivists of policies would recommend that the government

do nothing

In the period 1965 through the 1970s, policymakers pursued ________ policies in order to achieve ________.

expansionary; high employment

Complete Milton Friedman's famous proposition: "Inflation is always and everywhere a ________ phenomenon."

monetary

The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for

nonactivists

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

output will be lower

The disruption to financial markets starting in August 2007 that caused both consumer and business spending to fall

shifted the aggregate demand curve to the left

Policy makers cannot achieve both price stability and economic activity stability when facing

temporary supply shocks

The time it takes for policy makers to obtain data indicating what is happening in the economy is called

the data lag

The time it takes for the policy actually to have an impact on the economy is called

the effectiveness lag

The time it takes for policy makers to change policy instruments once they have decided on the new policy is called

the implementation lag

The time it takes to pass legislation to implement a particular policy is called

the legislative lag

The time it takes for policy makers to be sure of what the data are signaling about the future course of the economy is called

the recognition lag

The recognition lag is

the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy

The implementation lag is

the time it takes for policy makers to change policy instruments once they have decided on the new policy

The data lag is

the time it takes for policy makers to obtain data indicating what is happening in the economy

The effectiveness lag is

the time it takes for the policy actually to have an impact on the economy

The legislative lag represents

the time it takes to pass legislation to implement a particular policy

Theoretically, one can distinguish a demand-pull inflation from a cost-push inflation by comparing

the unemployment rate with its natural rate level

If aggregate output is below the natural rate level, activists of policies would recommend that the government

try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right