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Chapter 24: Q. 5 (page 655)
Why does the divine coincidence simplify the job of policymakers?
When monetary policy achieves the dual goals of price stability and economic activity stability in the economy, it is referred to as a divine coincidence. This simplifies the job of policymakers.
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Why does the self-correcting mechanism stop working when the policy rate hits the zero lower bound?
It can be an interesting exercise to compare the purchasing power of the dollar over different periods in history. Go to https://www.bls.gov/data/inflation_ calculator.htm to find the inflation calculator. Use this calculator to answer the following questions. a. If a new home cost \(125,000 in 2017, what would it have cost in 1950? b. The average annual household income in 2017 was about \)50,000. What would this income have been in 1945? c. An average new car cost about $25,000 in 2017. What would this car have cost in 1945?
d. Using your results from parts (b) and (c), did the purchase of a new car consume more or less of an average household鈥檚 income in 2017 than in 1945?
Use a graph of aggregate demand and supply to demonstrate how lags in the policy process can result in undesirable fluctuations in output and inflation.
Is stabilization policy more likely to be conducted through monetary policy or through fiscal policy? Why?
In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a 鈥渟oft patch鈥� in the economy, in particular the possibility of a deflation. As a result, the Fed proactively lowered the federal funds rate from 1.75% in late 2002 to 1% by mid-2003, the lowest federal funds rate on record up to that point in time. In addition, the Fed committed to keeping the federal funds rate at this level for a considerable period of time. This policy was considered highly expansionary and was seen by some as potentially inflationary and unnecessary.
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