Problem 1
(a) Define the aggregate demand schedule. (b) How does a fiscal expansion affect the schedule under a flexible inflation target? (c) How would the central bank have to change monetary policy to hit its given inflation target in the long run?
Problem 3
An economy has the choice of having half its workers make annual wage agreements every January, and the other half make annual wage agreements every July, or instead forcing everyone to make their annual agreement on 1 July. Which system is likely to induce greater wage flexibility during a period of a few months and during a period of several years?
Problem 5
Which of the following statements is correct? (a) Inflation targeting implies the central bank can ignore what is happening to output. (b) Inflation targeting implies nominal interest rates will typically rise by more than the rise in inflation. (c) Inflation targeting was immediately abandoned once the financial crash of 2009 occurred.
Problem 7
OPEC raises the price of oil for a year but then an increase in the supply of oil from Russia bids oil prices back down again. Contrast the evolution of the economy if monetary policy follows: (a) a fixed interest rate or (b) flexible inflation targeting.
Problem 9
Use the Taylor rule \(r-r^{*}=(1+a)\left(\pi-\pi^{*}\right)+b\left(Y-Y^{*}\right)\) to answer the following questions: (a) What does the long-run target for the nominal interest rate depend on? (b) In the nominal interest version of the Taylor rule, what happens when there is an increase in inflation? (c) What do the absolute and relative sizes of both the parameters \(a\) and \(b\) respectively tell us?
Problem 11
Central banks, by focusing too much on the inflation rate for goods and services neglected important signals from asset prices that risk-taking had become excessive.' Do you agree? What is this likely to imply in future?
Problem 12
Imagine that the UK adopts the euro, and interest rates are set by the European Central Bank. (a) Are euro interest rates likely to be adjusted to help stabilize either UK inflation or UK output? (b) What automatic mechanisms, if any, can still achieve these outcomes? (c) Would UK fiscal policy be able to help more?
Problem 14
Essay question 'Climate change is essentially a permanent adverse supply shock. Production costs will rise; potential output will fall. If the private sector fails to adjust, then either monetary or fiscal policy will have to reduce aggregate demand to the required lower level.' Discuss.
