Discuss the role of credit market imperfections in the

Question

Practice Questions #5:

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:

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?
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.
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?
4. Discuss  the role of credit market imperfections in the transmission of monetary  policy.