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Questions
FA25 ECON 302 002 Final Exam
Multiple dropdown selections
You are a staff economist with the Federal Reserve. The chairman says to you, “We are seeing signs of inflation above our target rate, and I don’t think the Phillips curve is very steep. What should we do to bring the rate back to our target rate?” How do you respond? Answer: “Because the Phillips curve is relatively flat, we need to [ Select ] decrease increase interest rates [ Select ] by just a little very aggressively in order to [ Select ] raise lower the investment-to-potential output ratio and hence short-run output. A flat Phillips curve requires a [ Select ] big change small change in short-run output in order to lower the inflation rate.”
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Approach Analysis
Question restatement: You are advising on monetary policy when inflation is above target and the chairman questions the use of the Phillips curve when it is flat. The scenario asks you to fill in four dropdowns with the provided selections: increase, very aggressively, lower, big change.
Option 1 (first dropdown): increase vs decrease. Why choose increase? In the face of higher inflation and a flat Phillips curve, policymakers typically tighten policy to dampen demand pressures. A decrease in interest rates would tend to stimulate demand and could further push inflation up, which is contrary to the objective of lowering inflation. Therefore, selecting increase is the move that aligns with const......Login to view full explanationLog in for full answers
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Similar Questions
An open economy is fully characterized by the following IS curve, monetary policy rule, and Phillips curve: IS: 𝑌 ~ 𝑡 = 𝑎 ¯ − ( 𝑏 ¯ 𝑖 + 𝑏 ¯ 𝑛 𝑥 ) ( 𝑅 𝑡 − 𝑟 ¯ ) + 𝑏 ¯ 𝑛 𝑥 ( 𝑅 𝑡 ∗ − 𝑟 ¯ ) , where 𝑅 𝑡 ∗ is the real interest abroad, 𝑎 ¯ = 𝑎 ¯ 𝑐 + 𝑎 ¯ 𝑖 + 𝑎 ¯ 𝑔 + 𝑎 ¯ 𝑛 𝑥 − 1 , and 𝑎 ¯ 𝑛 𝑥 = 𝑎 ¯ 𝑒 𝑥 − 𝑎 ¯ 𝑖 𝑚 . Monetary policy rule: 𝑅 𝑡 − 𝑟 ¯ = 𝑚 ¯ ( 𝜋 𝑡 − 𝜋 ¯ ) Phillips curve: 𝜋 𝑡 = 𝜋 𝑡 − 1 + 𝑣 ¯ 𝑌 ~ 𝑡 + 𝑜 ¯ 𝑡 Assume that 𝑎 ¯ = 0 , 𝑎 ¯ 𝑛 𝑥 = 0 , 𝑏 ¯ 𝑖 = 𝑏 ¯ 𝑛 𝑥 = 0.2 , 𝑣 ¯ = 0.5 , 𝑅 𝑡 ∗ = 0.04 , 𝑟 ¯ = 0.03 , 𝜋 𝑡 − 1 = 𝜋 ¯ = 0.02 , 𝑚 ¯ = 1 , and 𝑜 ¯ 𝑡 = 0.025 . Calculate 𝜋 𝑡 = ______ percent. Round your answer to the nearest tenth of a percent. Note: Calculate your answers for this one and the next three questions in a spreadsheet application. Enter rounded numbers in the answer box for each question. Do not, however, round your intermediate answers in the spreadsheet.
An open economy is fully characterized by the following IS curve, monetary policy rule, and Phillips curve: IS: 𝑌 ~ 𝑡 = 𝑎 ¯ − ( 𝑏 ¯ 𝑖 + 𝑏 ¯ 𝑛 𝑥 ) ( 𝑅 𝑡 − 𝑟 ¯ ) + 𝑏 ¯ 𝑛 𝑥 ( 𝑅 𝑡 ∗ − 𝑟 ¯ ) , where 𝑅 𝑡 ∗ is the real interest abroad, 𝑎 ¯ = 𝑎 ¯ 𝑐 + 𝑎 ¯ 𝑖 + 𝑎 ¯ 𝑔 + 𝑎 ¯ 𝑛 𝑥 − 1 , and 𝑎 ¯ 𝑛 𝑥 = 𝑎 ¯ 𝑒 𝑥 − 𝑎 ¯ 𝑖 𝑚 . Monetary policy rule: 𝑅 𝑡 − 𝑟 ¯ = 𝑚 ¯ ( 𝜋 𝑡 − 𝜋 ¯ ) Phillips curve: 𝜋 𝑡 = 𝜋 𝑡 − 1 + 𝑣 ¯ 𝑌 ~ 𝑡 + 𝑜 ¯ 𝑡 Assume that 𝑎 ¯ = 0 , 𝑎 ¯ 𝑛 𝑥 = 0 , 𝑏 ¯ 𝑖 = 𝑏 ¯ 𝑛 𝑥 = 0.2 , 𝑣 ¯ = 0.5 , 𝑅 𝑡 ∗ = 0.04 , 𝑟 ¯ = 0.03 , 𝜋 𝑡 − 1 = 𝜋 ¯ = 0.02 , 𝑚 ¯ = 1 , and 𝑜 ¯ 𝑡 = 0.045 . Calculate 𝜋 𝑡 = ______ percent. Round your answer to the nearest tenth of a percent. Note: Calculate your answers for this one and the next three questions in a spreadsheet application. Enter rounded numbers in the answer box for each question. Do not, however, round your intermediate answers in the spreadsheet.
Suppose the Federal Reserve decreases interest rates from 4% to 3%, which shifts aggregate demand and increases short-run output to 5.0%. If there are no other shocks to the economy, and the resulting change in inflation is 2.0 percentage points, what is the value of the parameter 𝜈 ¯ ? Round your answer to the nearest tenth.
Suppose the Federal Reserve decreases interest rates from 4% to 3%, which shifts aggregate demand and increases short-run output to 3.0%. If there are no other shocks to the economy, and the resulting change in inflation is 1.5 percentage point, what is the value of the parameter 𝜈 ¯ ? Round your answer to the nearest tenth.
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