1) When the economy is close to or at full employment why is it difficult for the Fed to decide whether or not to change its interest rate target in the federal funds market?
2) Explain why monetary policy makers believe that it is important to start restraining growth in aggregate demand before there is a noticeable increase in the CPI.
3) Draw an AS-AD diagram to illustrate the effects of rising inflation expectations on an economy threatened by inflationary growth in aggregate demand. Explain your diagram clearly.
4) Explain why expansionary monetary policy may be relatively ineffective and slow in helping an economy recover from a serious recession
5) Draw an AS-AD diagram to illustrate the results of a successful expansionary monetary policy.
6) Assume that workers, employers and investors all believed that inflation in the coming year would equal the annualized rate of inflation experienced in the past 6 months. Also assume that workers had been receiving nominal wage gains of 5% during a several year period where the annual inflation rate was 2%. and worker productivity growth was 3% per year. Now assume that a decline in the unemployment rate below NAIRU creates conditions where workers push for an annual real wage increase of 4%. Also assume that labor productivity growth declines to 1% per year as unemployment is squeezed below normal frictional & structural levels.
a) what rate of nominal wage growth will workers seek at the new low unemployment rate?
b) how fast will firms have to raise prices given your answer in (a) in order to protect profit margins?
c) if the rate of inflation in (b) occurs and the Fed allows AD to grow fast enough to maintain the unemployment rate below NAIRU for another year, what rate of nominal wage growth will workers seek in the following year?
d) if the rate of inflation in (b) had persisted for 6 months or more, how large an increase in the federal funds rate would be needed to increase the level of real interest rates in the economy?
7) Is the Fed currently pursuing an expansionary, neutral, or contractionary monetary policy? What if any difficulties do you think may be encountered in implementing the current policy being pursued by Fed Chai Janet Yellen (who succeeded Ben Bernanke in Feb 2014) to cope with one of the worst financial crises in the US since the Great depression?
1) One cornerstone of President George W. Bush’s economic policy during his first term in office was tax cuts targeted towards high income and high net worth households. Under his proposals the marginal tax rate applied to capital gains taxes has been reduced, taxes on stock dividend have been eliminated and marginal tax rates on wage and interest income, particularly those applied to high income brackets have also been reduced. Please note that the Bush Tax Cut has been extended by Obama Admin for 2 more years, 2011 and 2012 (Expired on Dec 31, 2012) and further extended in 2013 with some modifications.
a) What would be the short-run effects of tax cuts on interest rates and growth in RGDP given that the economy was in recession at the time of Bush’s tax cuts? Contrast the Keynesian and crowding out perspectives on this question.
b) If in question (a) we were interested in the long run effects of the proposed tax cuts would a “supply side” economist give a different answer to this question than an economist who believed that federal budget deficits created significant “crowding out” effects? Explain.
2) “Market Slump Helps Sell Tax Cuts Now.” (Headline from fall 2000) Explain from the standpoint of Keynesian macroeconomic theory why the slump in the stock market that began in the spring of 2000 help build support for Bush’s tax cut proposal in his first year in office
3)The exchange rate of the $ has declined by 20% or more against the currencies of major US trading partners during the past year. Do you think the Fed welcomes continued weakness in the exchange value of the $ at this time? Explain your answer carefully.
4) What is the “crowding out” effect of budget deficits? What determines whether crowding out leads to a minor or major reduction in the impact of expansionary fiscal policies on Aggregate Demand?
5) Why do think the European Union countries decide to have a single central bank and a single currency, instead of just agreeing to maintain fixed exchange rates among their currencies?
6a)What fiscal policies are recommended by conservative “supply-side” economists?
6b) What assumptions about the behavior of savers and investors are required for conservative supply side theories of the benefits of tax cuts to be correct?
6c) Why did the experience of the 1980’s following the massive Reagan tax cuts discredit supply side theory in the eyes of many economists?
7) How can large government deficits lead to large trade deficits?
8) Although the monetary authorities are concerned that the high level of the $ exchange rate is holding back the economic recovery, (see e.g. question 3a), they are afraid of a sudden major negative shift in investor sentiment towards the $. Explain why.
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