Question 1

Why do new classical economists say that activist policy might be not just ineffective but mistaken?

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Question 2

Show a graph of AS-AD where expansionary monetary policy that does not meet expectations leads to a reduction in output.

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Question 3

At the beginning of the Reagan administration, AS shifted in spite of the Fed's commitment to lower inflation. What does this imply about the labor market and the validity of the new classical assumptions?

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Question 4

Some countries use price indexation, meaning many contracts are adjusted for inflation automatically. How would full indexation of all contracts and agreements affect the effectiveness of EMP?

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Question 5

Use an AS-AD graph to show difference in the short-run effect of EMP in a standard Keynesian and a new Keynesian model.

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Question 6

Starting from the natural rate of output on an AS-AD diagram, show and explain how a new classical economist would recommend using monetary policy to lower the equilibrium price.

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Question 7

If output starts below the natural rate, and the central bank reduces the interest rate to shift AD and raise output back to the natural rate, what is the difference in the response of AS under the new Keynesian and new Classical models?

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Question 8

Explain why the new Keynesian model is less optimistic about curbing inflation.

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Question 9

What is a major difference in the conduct of the Fed and the ECB that might affect their credibility as inflation fighters?

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Quiz 26: Rational Expectations Redux: Monetary Policy Implications