Chapter 21 HW

For each of the following scenarios, illustrate the effects of the development on both the short-run and long-run Phllips curves (SRPC and LRPC, respectively). There is a decrease in taxes.

Move left on SRPC

Suppose the governments of two different economies, economy X and economy Y, implement a permanent tax cut of the same size. The marginal propensity to consume (MPC) in economy X is 0.85 and the MPC in economy Y is 0.8. The economies are identical in all other respects. The tax cut will have a larger impact on aggregate demand in the economy with the _________

larger MPC

Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. 1). Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. 2). The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. 3). Businesses make investment plans many months in advance. 4). The current tax system acts as an automatic stabilizer.

1, 2

Which of the following are examples of automatic stabilizers? Check all that apply. 1). Corporate income taxes 2). Unemployment insurance benefits 3). The discount rate

1, 2

What does the previous analysis suggest about the market for money? 1). The quantity of money demanded increases as the interest rate rises. 2). The quantity of money demanded decreases as the interest rate rises. 3). The supply of money is independent of the interest rate.

2

Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation rate. True or False: If expectations of inflation adjust quickly to actual inflation, it would make the recession induced by contractionary monetary policy more severe.

False

Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation rate. True or False: If wage contracts have short duration, it would make the recession induced by contractionary monetary policy more severe.

False

For each of the following scenarios, illustrate the effects of the development on both the short-run and long-run Phllips curves (SRPC and LRPC, respectively). There is a fall in the natural rate of unemployment.

LRPC left, SRPC left

For each of the following scenarios, illustrate the effects of the development on both the short-run and long-run Phllips curves (SRPC and LRPC, respectively). There is a rise in expected inflation.

SRPC right

For each of the following scenarios, illustrate the effects of the development on both the short-run and long-run Phllips curves (SRPC and LRPC, respectively). There is a rise in the price of imported oil.

SRPC right

Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation rate. True or False: If there is little confidence in the Fed's determination to reduce inflation, it would make the recession induced by contractionary monetary policy more severe.

True

Suppose the Fed announces that it is lowering its target interest rate by 50 basis points, or 0.5 percentage point. To do this, the Fed will use open-market operations to ________ the _____ money by _____ the public.

increase, supply of, buying bonds from

Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will _____ the cost of borrowing, causing residential and business investment spending to _____ and the quantity of output demanded to _______ at each price level.

reduce, increase, increase