Exam 26: Rational Expectations Redux: Monetary Policy Implications

In the new classical framework, anti-inflationary monetary policy could lead to an increase in output if the policy change was more aggressive than expected.

If an increase in the federal funds rate is less than what was expected, prices could rise.

If output was above the natural rate and the central bank raised interest rates to shift AD left so output fell back to the natural rate, the AS curve would respond by

In the new Keynesian model, the cost of disinflation due to lower employment depends on

If output starts below the natural rate, and the central bank reduces the interest rate to shift AD and raise output back to the natural rate, what is the difference in the response of AS under the new Keynesian and new Classical models?

Sargent is one of a number of economists who introduced rational expectations into macroeconomic models.

Explain why the new Keynesian model is less optimistic about curbing inflation.

Show a graph of AS-AD where expansionary monetary policy that does not meet expectations leads to a reduction in output.

Unlike new Keynesian models, new classical models assume rational expectations.

Lucas stressed the importance of fiscal policy for stabilizing the real economy.

What are the implications about the long run under new classical assumptions?

The short-run effect of unanticipated policy changes is the same for the traditional AS-AD, new Keynesian and new classical models.

If government spending rises less than expected, then the equilibrium price level rises under the

Reputation plays a role in the credibility of a central banker.

Starting from the natural rate of output on an AS-AD diagram, show and explain how a new classical economist would recommend using monetary policy to lower the equilibrium price.

Anticipated EMP has ____ effect on output in the new Keynesian model compared to the standard version.

New classical economists tend to favor non-activist policies.

In the new classical framework, inflation can be lowered with a credible commitment by monetary policymakers without any decrease in output.

The inflationary effect of anticipated EMP is less in the new Keynesian model than in the traditional AS-AD model.

The disinflation policies of the early 1980s were not costly due to