Chapter 24: Q. 19 (page 655)
How can monetary authorities target any inflation rate they wish?
Using autonomous monetary policy easing and tightening, monetary policymakers can target any inflation rate.
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In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a “soft patch” 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.
Many developing countries suffer from endemic corruption. How does this help explain why these countries’ economies typically have high inflation and economic stagnation? Use a graph of aggregate demand and supply to demonstrate.
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.
. Why do activists believe that the economy’s selfcorrecting mechanism works slowly?
Suppose that f is determined by two factors: financial panic and asset purchases.
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