Exam 14: Macroeconomic Policy: Challenges in a Global Economy

Credit default swaps:

According to the equation for the Phillips curve,there is a unique tradeoff between inflation and unemployment for each level of inflationary expectations.

If policymakers attempt to reduce the rate of unemployment below its natural rate:

If wages are sticky,then monetary policy actions:

The long-run Phillips curve is vertical.

As the economy recovers,the Fed will wind down its bond purchases,causing interest rates to fall.

The stagflation of the 1960s and 1970s showed policymakers that:

The 2007-2009 recession was shallower than the previous two recessions,in 1990 and 2001.

Deflation can be good because it reduces the burden of existing debt.

Which of the following events will NOT occur if policymakers want to keep unemployment below the natural rate?

Assume that in Economyland,people make forecasts based on adaptive expectations.The central bank announces that it will fight a slight recession by increasing the money supply.What would be the effect of the announcement on inflation in the short run? The long run? How would your answers differ if people used rational expectations? Which situation do you think is more realistic,and why?

In the long run,any demand-side policy that attempts to reduce unemployment below its natural rate will:

Which of these companies did the Fed and the Treasury allow to fail to send a message to the financial markets about the costs of risky behavior?

U.S.Treasury securities are usually considered default free and are therefore in high demand when economic conditions make other securities seem more risky.What will happen to the U.S.government's ability to keep deficits and debt under control over the long term if world demand for Treasuries increases?

If policymakers are successful at reducing inflationary expectations:

Use the following to answer questions Figure: Determining Long Run and Short Run Economic Shifts -(Figure: Determining Long Run and Short Run Economic Shifts)Starting at point r,the economy will move to ____ in the short run if policymakers successfully increase aggregate demand.

Briefly explain the two major models of expectations formation.What are the implications for macroeconomic policy of assuming one model or the other?

Country X is practicing expansionary monetary policy.This helps improve its trade balance.

Use the following to answer questions Figure: Understanding Expectation Theories -(Figure: Understanding Expectation Theories)Assume the economy is at point c.According to the theory of rational expectations,if the Fed announces and then starts a plan to practice contractionary policy,the economy will move from point c:

Even though recent legislation has slowed the rise in health care costs,the overall cost of Medicare remains unsustainable in the long term.