Chapter 24: Q. 24 (page 655)
What nonconventional monetary policies shift the aggregate demand curve, and how do they work?
Actual interest rates and credit score gaps are reduced as a result of nonconventional monetary policies.
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“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.
As monetary policymakers become more concerned with inflation stabilization, the slope of the aggregate demand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curve help stabilize inflation when the economy is hit with a temporary negative supply shock? How does this affect output? Use a graph of aggregate demand and supply to demonstrate.
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.
It can be an interesting exercise to compare the purchasing power of the dollar over different periods in history. Go to https://www.bls.gov/data/inflation_ calculator.htm to find the inflation calculator. Use this calculator to answer the following questions. a. If a new home cost \(125,000 in 2017, what would it have cost in 1950? b. The average annual household income in 2017 was about \)50,000. What would this income have been in 1945? c. An average new car cost about $25,000 in 2017. What would this car have cost in 1945?
d. Using your results from parts (b) and (c), did the purchase of a new car consume more or less of an average household’s income in 2017 than in 1945?
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.
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