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Chapter 24: Q.2 (page 655)

“If autonomous spending falls, the central bank should lower its inflation target in order to stabilize inflation.” Is this statement true, false, or uncertain? Explain your answer

Short Answer

Expert verified

The statement is false because the financial organisation is the autonomous body and might take corrective actions to stabilize the condition of the economy.

Step by step solution

01

Concept Introduction  

Inflation is the continuous increase in the prices associated with goods and services within an economy during a selected period of your time.

02

Explanation of Solution 

The statement is fake because the financial organisation is the autonomous body and might take corrective actions to stabilize the condition of the economy. this example may be easily handled by the employment of a stabilization policy which is in a position to stabilize both inflation and output within the economy easily.

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Most popular questions from this chapter

The Problems update with real-time data in MyLab Economics and are available for practice or instructor assignment. 1. On January 19, 2017, the Federal Reserve released its amended statement on longer-run goals and monetary policy strategy. It stated: “The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate” and that “the median of FOMC participants’ estimates of the longer-run normal rate of unemployment was 4.8 percent.” Assume this statement implies that the natural rate of unemployment is believed to be 4.8%. Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), real GDP (GDPC1), and real potential gross domestic product (GDPPOT), an estimate of potential GDP. For the price index, adjust the units setting to “Percent Change From Year Ago.” Download the data into a spreadsheet.

  1. For the most recent four quarters of data available, calculate the average inflation gap using the 2% target referenced by the Fed. Calculate this value as the average of the inflation gaps over the four quarters.
  2. For the most recent four quarters of data available, calculate the average output gap using the GDP measure and the potential GDP estimate. Calculate the gap as the percentage deviation of output from the potential level of output. Calculate the average value over the most recent four quarters of data available.
  3. For the most recent 12 months of data available, calculate the average unemployment gap, using 5.6% as the presumed natural rate of unemployment. Based on your answers to parts (a) through (c), does the divine coincidence apply to the current economic situation? Why or why not? What does your answer imply about the sources of shocks that have impacted the current economy? Briefly explain.

For each of the following shocks, describe how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a longrun equilibrium.

a. Consumers reduce autonomous consumption.

b. Financial frictions decrease.

c. Government spending increases.

d. Taxes increase.

e. The domestic currency appreciates.

Assume that aggregate output is below the natural rate level. What would an activist policy recommend that the government do? Explain your answer.

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.

If an economy’s self-correcting mechanism works slowly, should the government necessarily pursue an activist policy to eliminate unemployment? Why or why not?
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