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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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.
“Policymakers would never respond by stabilizing output in response to a temporary positive supply shock.” Is this statement true, false, or uncertain? Explain your answer.
Activists regard the self-correcting mechanism, which works through wage and price adjustment, as very slow and hence feel that the government should pursue active, accommodating policy to address high unemployment when it develops. Nonactivists, by contrast, believe that the self-correcting mechanism works quickly and therefore advocate that the government should avoid the implementation of active policies aimed at eliminating unemployment.
How can demand-pull inflation lead to cost-push inflation?
Is stabilization policy more likely to be conducted through monetary policy or through fiscal policy? Why?
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