Chapter 16

Question 1

What are 2 reasons monetary policy is difficult?

Answer 1

1. The Federal Reserve must operate in real time
   when much of the data about the state of the
   economy is unknown.
2. The Federal Reserve’s control of the money supply
   is incomplete and subject to uncertain lags.

Question 2

What is disinflation?

Answer 2

a significant reduction in the rate of

inflation.

Question 3

What is deflation?

Answer 3

a decrease in prices, that is, a negative inflation rate

Question 4

If a central bank wishes to undertake a disinflation, the policy must be..

Answer 4

credible

Question 5

If nominal wage growth is too high, some workers will end up being very expensive and employers will choose to..

Answer 5

lay them off

Question 6

What is credible monetary policy?

Answer 6

a monetary policy is credible when it is expected that a central bank will stick
with its policy.

Question 7

What is market confidence?

Answer 7

One of the Fed’s most powerful tools, is its influence over expectations, not its influence over the money supply

Question 8

If the public believes that the Fed is committed to reducing unemployment, what will this do?

Answer 8

It will boost consumer confidence and the AD shifts right due to the increase in the rate of velocity

Question 9

What happens when the LRAS shifts left?

Answer 9

Inflation increases and GDP growth decreases

Question 10

A reduction in the money supply reduces the inflation right but also..

Answer 10

reduces economic growth

Question 11

What happens to economic productivity when the money supply increases?

Answer 11

Productivity decreases and most of the increase in productivity will show up in inflation

Question 12

A real shock will shift the LRAS curve which way?

Answer 12

To the left. This will move the economy into a recession

Question 13

How do you reduce inflation?

Answer 13

Reduce the money supply