Chapter 24: Q. 5 (page 655)
Why does the divine coincidence simplify the job of policymakers?
When monetary policy achieves the dual goals of price stability and economic activity stability in the economy, it is referred to as a divine coincidence. This simplifies the job of policymakers.
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Suppose the current administration decides to decrease government expenditures as a means of cutting the existing government budget deficit.
In what way is a permanent negative supply shock worse than a temporary negative supply shock?
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of unemployment (NROU). For the price index, adjust the units setting to “Percent Change From Year Ago.” For the unemployment rate, adjust the frequency setting to “Quarterly.” Select the data from through the most current data available, download the data, and plot all three variables on the same graph. Using your graph, identify periods of demand-pull or costpush movements in the inflation rate. Briefly explain your reasoning.
During the global financial crisis, how was the Fed able to help offset the sharp increase in financial frictions without the option of lowering interest rates further? Did the Fed’s plan work?
Suppose that welfare gains derived from eliminating output (and unemployment) fluctuations in the economy can be measured. Assuming these gains are relatively small for the average individual, how do you think this measurement would affect the activist/ nonactivist debate?
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