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Chapter 24: Q. 9 (page 655)

鈥淧olicymakers would never respond by stabilizing output in response to a temporary positive supply shock.鈥� Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

The statement is uncertain.

Step by step solution

01

Step 1. Introduction

Inflation is defined as a steady increase in the prices of goods and services within an economy over time.

02

Step 2. Explanation

Because the extent of the brief positive supply shock affects the assertion, it is ambiguous. If it is significant enough, it can lower inflation or raise output, but this will increase inflation variability and uncertainty, destabilising the economy. As a result, policymakers' responses are influenced by the magnitude of the brief positive supply shock.

03

Step 3. Conclusion

Hence, the statement is uncertain.

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of unemployment (NROU). For the price index, adjust the units setting to "Percent Change From Year Ago." For the unemployment rate, adjust the frequency setting to "Quarterly." Select the data from 2000through the most current data available, download the data, and plot all three variables on the same graph. Using your graph, identify periods of demand-pull or costpush movements in the inflation rate. Briefly explain your reasoning.

Assume that aggregate output is below the natural rate level. What would an activist policy recommend that the government do? Explain your answer.

Why does the self-correcting mechanism stop working when the policy rate hits the zero lower bound?

For aggregate demand shocks and permanent supply shocks, the price stability and economic activity stability objectives are consistent: Stabilizing inflation stabilizes economic activity, even in the short run. For temporary supply shocks, however, there is a trade-off between stabilizing inflation and stabilizing economic activity in the short run. In the long run, however, there is no conflict between stabilizing inflation and stabilizing economic activity.

Suppose the current administration decides to decrease government expenditures as a means of cutting the existing government budget deficit.

  1. Using a graph of aggregate demand and supply, show the effects of such a decision on the economy in the short run. Describe the effects on inflation and output.
  2. What will be the effect on the real interest rate, the inflation rate, and the output level if the Federal Reserve decides to stabilize the inflation rate?
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