Exam 14: Macroeconomic Policy: Challenges in a Global Economy

Monetized debt

Monetized debt results in a decrease in the value of the dollar.

Some analysts blame the financial crisis of 2007-2009 on Federal Reserve policy. They argue that

Describe the criticisms of the rational expectations theory.

Assume that inflation rates for the past 5 years have been 1%, 2%, 2.5%, 2%, 2%. The Federal Reserve announces that it is going to decrease the money supply because it is concerned about inflationary pressures in the economy. If people form their expectations _____, then in light of the Fed's announcement, they will expect an inflation rate of _____.

The Phillips curve shows a positive relationship between wages and unemployment.

Given that wages are often the highest cost for a firm, is it possible for wages to rise and prices to fall? Explain.

Explain what Phillips curves are and what relationship they postulate between inflation and unemployment. Draw a graph to support your response.

As inflation rises, the real value of the national debt rises.

What factors affect the government's ability to keep deficits and debt under control over the long term? Explain.

The Phillips curve shows the tradeoff between unemployment and the interest rate.

The contractionary policies of the Federal Reserve under Paul Volcker to reduce inflationary pressures in the economy

Milton Friedman argued that

Stagflation is the simultaneous occurrence of both inflation and unemployment.

If policymakers use expansionary measures to reduce unemployment below its natural rate, the economy will endure decelerating inflation.

The 2007-2009 recession can be shown as a combination of a(n) _____ in aggregate demand and _____ in the short-run aggregate supply.

What factor does NOT help to explain the recent phenomenon of a jobless recovery?

Stagflation is the simultaneous occurrence of _____ unemployment and _____ inflation.

Which statement(s) is/are TRUE? I. Increased use of technology has enabled companies to use fewer workers, contributing to jobless recoveries. II) The use of fiscal and monetary policy to address a jobless recovery will not lead to spending by consumers and to firms being crowded out by government spending. III) Increasing taxes to reduce the national debt is an appropriate policy to address a jobless recovery.

New Keynesian economists critique rational expectations by arguing that short-term wage stickiness is brought about by