C.14 Aggregate Demand, Aggregate Supply, and Monetary Policy

Question 1

AD-As Model

Answer 1

Explains short-run fluctuations in the output gay and inflation rate

Question 2

Central bank reaction f’n

Answer 2

A rule/formula that a central bank uses to set interest rates in response to changing economic conditions

Question 3

Monetary rule

Answer 3

A commitment by the central bank to follow specific and publicly announced guidelines for monetary policy

Question 4

Taylor rule

Answer 4

A monetary policy guideline developed by economist John Taylor for determining the target for the short-term nominal policy rate

Question 5

Time-inconsistency problem

Answer 5

The tendency of policymakers to announce one policy in advance in order to change the expectations of households and firms, and then to follow another policy after households and firms have made economic decisions based on the announced policy

Question 6

Stagflation

Answer 6

Combination of high inflation and recession from a negative supply shock