Identifications:
- Crowding out
- (Modern) quantity theory of money
- Natural rates of unemployment & output
- NAIRU
- Long-run aggregate supply curve
- Cost-push inflation
- Demand-pull inflation
- Supply shocks
- Stagflation
- Hysterisis
- Real business cycle theory
- “Animal spirits”
- Transmission mechanisms
- Durable goods
- Credit view
- Accomodating policy
- Monetization
- Ricardian equivalence
- Budget deficit
- Activist/non-activist policy
True/False/Uncertain:
1. Both Keynesians and monetarists believe that an increase in government expenditures is offset by a decrease in private spending.
2. The more flexible are wages, the less effective are both fiscal and monetary policy in increasing output.
3. If the domestic currency depreciates, output increases in the long run.
4. It is impossible to sustain output beyond the natural rate level of output.
5. A negative supply shock has no long-run effect on prices or output.
6. Monetarists think the long run is longer than the Keynesians do.
7. Changes in the money supply cause changes in output.
8. If an economy is in a liquidity trap, further reducing the interest rate will have no effect on the economy.
9. If there is price deflation, low nominal interest rates indicate that the cost of borrowing is low.
10. The cost of financing investment is related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates.
11. Only sustained growth of the money supply can cause inflation in the long run.
12. Cost-push inflation cannot occur without accommodating monetary policy.
13. Inflation does not result from government budget deficits.
Other Questions:
Question 1. Suppose that Alan Greenspan’s successor is an inflation ‘dove’, and consequently the public’s expectations of future inflation increase. What will happen to aggregate output and the price level in the short run?
Question 2. Compare the classical and expanded AD-AS models on the following grounds: (1) full employment, (2) the importance of AD, (3) the efficacy of monetary policy, (4) the efficacy of fiscal policy, (5) the importance of AS, and (6) causes of inflation.
Question 3. Discuss the role the following prices play in transmitting monetary effects onto the economy: interest rates (i.e., bond prices), exchange rates, equity prices. How do the monetarists and Keynesians differ in their views on the importance of these prices?
Question 4. Discuss the role of credit market imperfections in the transmission of monetary policy.