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Chapter 22: Q. 10 (page 582)

"Autonomous monetary policy is more effective at changing output when λ is higher." Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

The impact in output is true whenλis higher.

Step by step solution

01

Introduction

Monetary autonomy refers to a country's central bank's ability to influence its own money supply and domestic economic conditions.

In a floating exchange rate regime, the central bank has complete control over the money supply.

The macroeconomic policy trilemma states that an independent monetary policy, a stable exchange rate.

And unfettered capital movement are all impossible to achieve at the same time.

02

Explanation

The response of real interest rates to current inflation rates is called λ.

Under the influence of inflation, the larger the λ, the higher the interest rates.

Regardless of the current value of λ, every change in autonomous monetary policy will have the same effect on output.

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Most popular questions from this chapter

Go to https://www.federalreserve.gov/monetarypolicy/ files/FOMC_LongerRunGoals.pdf. Review the FOMC’s document, “Longer-Run Goals and Monetary Policy Strategy.” Explain why these goals are consistent with the Taylor principle.

Consider an economy described by the following:

C = \(3.25 trillion

I = \)1.3 trillion

G = \(3.5 trillion

T = \)3.0 trillion

NX = -$1.0 trillion

f = 1

mpc = 0.75

d = 0.3

x = 0.1

l = 1

r = 1

a. Derive expressions for the MP curve and the AD

curve.

b. Assume that p = 1. Calculate the real interest

rate, the equilibrium level of output, consumption,

planned investment, and net exports.

c. Suppose the Fed increases r to r = 2. Calculate the

real interest rate, the equilibrium level of output,

consumption, planned investment, and net exports

at this new level of r.

d. Considering that output, consumption, planned

investment, and net exports all decreased in part (c),

why might the Fed choose to increase r?

Suppose that government spending is increased at the same time that an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve?

For each of the following situations, describe how (if at all) the IS, MP, and AD curves are affected.

a. A decrease in financial frictions

b. An increase in taxes and an autonomous easing of monetary policy

c. An increase in the current inflation rate

d. A decrease in autonomous consumption

e. Firms become more optimistic about the future of the economy.

f. The new Federal Reserve chair begins to care more about fighting inflation.

“If f increases, then the Fed can keep output constant by reducing the real interest rate by the same amount as the increase in financial frictions.” Is this statement true, false, or uncertain? Explain your answer.
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