Question 1

One explanation for the length of the Great Recession is that there was a leftward shift in the long-run aggregate supply curve,caused by

Accepted Answer

New financial regulations increased the cost of borrowing for banks, which in turn reduced the amount of money they were willing to lend to businesses and consumers. This led to a decrease in aggregate supply, which contributed to the length of the Great Recession.

Question 2

Who benefits most from inflation?

Accepted Answer

Those who can predict the inflation rate can adjust their financial strategies accordingly, benefiting from inflation by making informed investment and spending decisions.

Question 3

Which 2009 condition limited the Federal Reserve's options in the use of traditional expansionary monetary policy?

Accepted Answer

If the federal funds rate is already at 0 percent, the Federal Reserve cannot lower interest rates any further through traditional expansionary monetary policy. This is known as the zero lower bound, and it limits the options available to the Fed in stimulating the economy.

Question 4

Explain how expansionary monetary policy can lead to inflation,and discuss the types of individuals who are hurt by unexpected inflation.

Accepted Answer

The answer of Explain how expansionary monetary policy can lead...

Question 5

What is the impact on prices of expansionary monetary policy?

Accepted Answer

Expansionary monetary policy leads to an increase in the money supply, which results in increased aggregate demand and puts upward pressure on prices. However, the impact on prices is not uniform and can vary depending on various factors such as the timing, magnitude, and effectiveness of the policy. Some prices may rise more than others, while some may remain constant or even fall. Therefore, the most likely impact of expansionary monetary policy on prices is unevenly rising prices.

Question 6

If expectations are adaptive,then what is the long-run danger of an activist monetary policy?

Accepted Answer

If expectations are adaptive, then an activist monetary policy can lead to high inflation in the long run. This is because people will come to expect that the central bank will always inflate the economy, and they will adjust their behavior accordingly. For example, workers will demand higher wages to compensate for expected inflation, and businesses will raise prices to protect their profit margins. This can lead to a vicious cycle of inflation, as higher prices lead to higher wages, which in turn lead to higher prices.

Question 7

What happens if aggregate demand decreases simultaneously with an increase in short-run aggregate supply,due to anticipated contractionary monetary policy?

Accepted Answer

The answer of What happens if aggregate demand decreases simultaneously...

Question 8

Explain the impact of expansionary monetary policy on the entire macroeconomy in the short run.Be sure to use a step-by-step analysis of the macroeconomy.

Accepted Answer

The answer of Explain the impact of expansionary monetary policy...

Question 9

During a contraction of the money supply,which attribute of prices prevents firms from adjusting wages and loans in the short run?

Accepted Answer

During a contraction of the money supply, prices are often sticky in the short run, meaning that they do not adjust quickly to changes in the money supply. This makes it difficult for firms to adjust wages and loans to match the reduced amount of money in circulation, leading to potential unemployment and other economic challenges.

Question 10

Explain the difference between "real" and "nominal" effects of monetary policy and its effect on the economy.

Accepted Answer

The answer of Explain the difference between "real" and "nominal"...

Question 11

How will expansionary monetary policy impact real wages under long-term contracts?

Accepted Answer

Expansionary monetary policy typically leads to inflation, which can erode the purchasing power of wages set under long-term contracts, causing real wages to decrease.

Question 12

Between 1929 and 1933,what triggered a major contraction in the money supply?

Accepted Answer

Bank failures triggered a wave of panic among depositors, who began to withdraw their money from banks en masse. This led to a major contraction in the money supply, as banks had less money to lend out and were forced to call in loans. This contraction in the money supply helped to deepen and prolong the Great Depression.

Question 13

Consider this excerpt from the textbook: "In the fall of 2007,it was clear that the U.S.economy was slowing.The unemployment rate rose from 4.4 percent to 5 percent between May and June 2007,and real [gross domestic product] GDP grew by just 1.7 percent in the fourth quarter.The U.S.economy officially entered recession in December 2007.We now know that the nation's economy was entering several years of low growth and high unemployment.Many economists believe that a decline in aggregate demand was one of the causes of the recession." What did the Federal Reserve do in response to this decline in aggregate demand?

Accepted Answer

The answer of Consider this excerpt from the textbook: "In...

Question 14

What is meant by the phrase "prices are sticky"?

Accepted Answer

Sticky prices refer to the fact that in the short run, prices of goods and services are often slow to adjust to changes in supply and demand. This is because contracts, loans, and wages are often fixed in the short run, making it difficult for companies to adjust their prices. Therefore, option B is the best choice as it accurately describes the concept of sticky prices.

Question 15

Answer the following questions using an aggregate demand-aggregate supply model when appropriate.
a.Use a graph to represent an economy at long-run equilibrium.
b.Now graph what happens when aggregate demand decreases.
c.Referring to your graph,is this economy in an expansion or recession now?
d.Continuing with the economy you have graphed earlier,what type of monetary policy would you suggest be taken by the Federal Reserve?
e.What will this policy you suggested do to your aggregate demand-aggregate supply model?

Accepted Answer

The answer of Answer the following questions using an aggregate...

Question 16

You have just been chosen as an economist on the Board of Governors for the Federal Reserve.After years of constant growth,the U.S.economy begins to fall into a recession.What type of monetary policy do you suggest to the board,and why?

Accepted Answer

The answer of You have just been chosen as an...

Question 17

Explain the difference between expansionary monetary policy and contractionary monetary policy.

Accepted Answer

The answer of Explain the difference between expansionary monetary policy...

Question 18

What are two prominent classes of victims of unexpected inflation?

Accepted Answer

Unexpected inflation erodes the purchasing power of money, negatively impacting workers whose wages may not immediately adjust, and lenders who receive repayments in less valuable currency.

Question 19

What happens if aggregate demand increases simultaneously with a decrease in short-run aggregate supply,due to anticipated expansionary monetary policy?

Accepted Answer

When aggregate demand increases and short-run aggregate supply decreases, the price level typically rises due to increased demand and reduced supply. However, the effects on real GDP can vary, but in this scenario, it is likely to remain constant as the increase in demand is offset by the decrease in supply.

Question 20

Which two economic conditions challenged assumptions of activist monetary policy in the 1970s?

Accepted Answer

The two economic conditions that challenged assumptions of activist monetary policy in the 1970s were high inflation and high unemployment, also known as stagflation. This went against the traditional Phillips Curve model, which suggested a trade-off between inflation and unemployment that could be manipulated through monetary policy. The combination of high inflation and high unemployment presented a new challenge for policymakers who were faced with a dilemma of choosing between combatting inflation or promoting growth and employment.

Quiz 31: Monetary Policy