question
Assume that the United States government introduces an expansionary monetary policy, increasing the money supply in the market. In the accompanying graph, demonstrate the long run effect on aggregate demand and short run aggregate supply. Then, answer the following question.
In the classical model of the price level, what is the long run effect of an increase in the money supply on real GDP?
In the classical model of the price level, what is the long run effect of an increase in the money supply on real GDP?
answer
it has no effect on GDP
SRAS lines shifts left, AD line shifts right.
SRAS lines shifts left, AD line shifts right.
question
Using your knowledge of the inflation tax to answer the questions.
Which of the statements are true regarding the inflation tax?
Seignorage refers to
Which of the statements are true regarding the inflation tax?
Seignorage refers to
answer
By printing money to pay its debts, the government decrease the value of money and causes the inflation tax.
The federal government reserves the power to print money.
Seignorage refers to:
the revenue from printing money.
The federal government reserves the power to print money.
Seignorage refers to:
the revenue from printing money.
question
Determine whether each of the statements describes inflation, deflation, or both.
Inflation
Both
Deflation
Inflation
Both
Deflation
answer
Inflation
characterized by an overall rise in prices
has become the norm for economies since WWI
Both
the Philips curve can shed light on this phenomenon
Deflation
characterized by an overall drop in prices
leads to a liquidity trap when interest rate approach zero
characterized by an overall rise in prices
has become the norm for economies since WWI
Both
the Philips curve can shed light on this phenomenon
Deflation
characterized by an overall drop in prices
leads to a liquidity trap when interest rate approach zero
question
Please match each of the descriptions with the corresponding organization or group.
Who bears the full burden of the "inflation tax?"
Who is responsible for issuing U.S. debt in order to finance the government's purchases?
Who sells government debt in open-market purchases?
Who buys back government debt through open-market purchases?
Who bears the full burden of the "inflation tax?"
Who is responsible for issuing U.S. debt in order to finance the government's purchases?
Who sells government debt in open-market purchases?
Who buys back government debt through open-market purchases?
answer
holders of money
U.S. Treasury
holders of Treasury securities
Federal Reserve
U.S. Treasury
holders of Treasury securities
Federal Reserve
question
Okun's law states that
Which is a prediction consistent with Okun's law?
Which is a prediction consistent with Okun's law?
answer
a change in the output gap occurs with a change in the rate of unemployment that is smaller in magnitude and in the opposite direction.
An increase in real GDP of 4% leads to a decrease in the unemployment rate of 2%.
An increase in real GDP of 4% leads to a decrease in the unemployment rate of 2%.
question
The accompanying graph depicts the Short-Run Phillips Curve (SRPC) when the public expects no inflation in the economy.
a. According to this SRPC, what would inflation be if unemployment is 33%?
_______________________________________ %
b. Please move the SRPC line to reflect what would happen if the public's inflation expectations increased so that they now expect the inflation rate to increase by 2%.
_______________________________________ %
c. If the unemployment rate is still 33%, what is the new inflation rate after this change in expectations?
a. According to this SRPC, what would inflation be if unemployment is 33%?
_______________________________________ %
b. Please move the SRPC line to reflect what would happen if the public's inflation expectations increased so that they now expect the inflation rate to increase by 2%.
_______________________________________ %
c. If the unemployment rate is still 33%, what is the new inflation rate after this change in expectations?
answer
2%
graph: SRPC line shifts up to 5% (1 , 5) (9 , 1)
4%
graph: SRPC line shifts up to 5% (1 , 5) (9 , 1)
4%
question
The accompanying graph depicts a hypothetical economy's short-run Philips curve (SRPC). Please adjust the SRPC to reflect what happens when expected inflation decreases by 2 percentage points.
After the shift in the SRPC, what is the unemployment rate if the public expects no inflation in the economy?
___________________________ %
After the shift in the SRPC, what is the unemployment rate if the public expects no inflation in the economy?
___________________________ %
answer
graph: SRPC lines shifts to 3% line (1 , 3) (9 , -1)
7%
7%
question
The relationship between inflation and unemployment in the short run is different from their relationship in the long run.
Which of the following is an important factor in that difference?
Which of the following is an important factor in that difference?
answer
Inflation Expectations
question
Suppose that, in the next year, the government plans to use monetary policy to decrease interest rates. In Graph 1, adjust the proper curve or curves appropriately to show the effect of the policy change. In Graph 2, move Point A to show what will happen to inflation in the long run as a result of the movement in Graph 1 (if any).
What happens to output as a result of the change in interest rates in the long run?
What happens to unemployment as a result of the change in the interest rates in the long run?
What happens to output as a result of the change in interest rates in the long run?
What happens to unemployment as a result of the change in the interest rates in the long run?
answer
Graph 1: Line AD shifts to the right, LRAS remains the same.
Graph 2: Point A moves up to line 5, long-run Philips curve stays the same.
Output will remain the same.
Unemployment will remain the same.
Graph 2: Point A moves up to line 5, long-run Philips curve stays the same.
Output will remain the same.
Unemployment will remain the same.
question
Suppose there is unexpected deflation this year that reduces the aggregate price level. The economy is depicted in the accompanying graph.
a. How does deflation affect borrowers and lenders?
b. Adjust the graph to show what would happen if those hurt by the deflation adjust their spending because of it.
a. How does deflation affect borrowers and lenders?
b. Adjust the graph to show what would happen if those hurt by the deflation adjust their spending because of it.
answer
Borrowers are negatively impacted and lenders are positively impacted.
graph: Line AD shifts to the left all other lines remain the same.
graph: Line AD shifts to the left all other lines remain the same.
question
What is a liquidity trap?
Which of these statements about liquidity traps is false?
Which of these statements about liquidity traps is false?
answer
When nominal interest rates cannot be lowered any further.
Firms are unlikely to undertake investment during liquidity traps because interest rates are prohibitively high.
Firms are unlikely to undertake investment during liquidity traps because interest rates are prohibitively high.
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