Question & Answer

1. If the government announced that it would, come what may, reduce the growth of money supply to zero next year, what (according to new classical economists) would happen? How might their answer be criticised?

2. For what reasons would a new classical economist support the policy of the Bank of England publishing its inflation forecasts and the minutes of the deliberations of the MPC?

What would the process of adjustment to the unanticipated size of the increase in aggregate demand look like if people had adjusted their inflationary expectation upwards from zero but to a rate less than p₁?

Is the assumption of rational expectations on its own sufficient for anticipated demand shocks to have no impact on economic activity even in the short run?

How would the political business cycle be affected if governments were able to choose when to hold elections?

Under what circumstances would a Phillips loop (a) be tall and thin; (b) short and wide?

How would the EAPCs and the LRPC be affected by an increase in the natural rate of unemployment?

Assume the economy is represented by EAPC₁ in Figure 21.1. Illustrate the effects of positive and negative inflation shocks on the curve.

If firms believe the aggregate supply curve to be relatively elastic, what effect will this belief have on the outcome of an increase in aggregate demand?

What is ‘learning by doing? Why is this a possible hysteresis channel?

1. Will the shape of the long-run AS curve here depend on just how the ‘long’ run is defined?

2. If a shift in the aggregate demand curve from AD to AD₁ in Figure 20.17 causes a movement from point a to point d in the long run, would a shift in aggregate demand from AD₁ to AD cause a movement from point d back to point a in the long run?

Why are real wages likely to be more flexible downwards than money wages?

Assume that there is a fall in aggregate demand (for goods). Trace through the short-run and long-run effect on employment.

Why are W_o and W_a curves rather than straight lines?

1. Trace through the effect of an adverse supply shock, such as a rise in oil prices.

2. What determines the amount that national income fluctuates when there is a temporary shift in the DAS curve?

Using a graph similar to Figure 20.7, trace through the effect of a reduction in aggregate demand.

How would the shifts in the SRAS curve be affected if, in response to rising output levels, firms increased their investment expenditures?

On a diagram similar to Figure 19.19, trace through the effects of (a) a fall in investment and (b) a fall in the money supply. On what does the size of the fall in national income depend?

Assume that national income is initially at Y₂ in Figure 19.19. Describe the process whereby equilibrium in both markets will be achieved.

Draw a diagram like Figure 19.18, only with just one L curve. Assume that the current level of national income is at Y₁. Now assume that the supply of money decreases. Show the effect on (a) the rate of interest; (b) the position of the LM curve.

Why might borrowing rates sometimes rise following a negative demand shock?

What effect does this have on the injections (J) line in the simple Keynesian model?

How would a central bank’s aversion to inflation affect how much the MP curve moves vertically downwards in response to a reduction in cost-push inflation?

(Looking at the Maths) The IS function can be written as

                     Y = IS(r, G, t, X, M, er, Y^e …)

where G is government expenditure, t is the tax rate, X and M are the levels of exports and imports, er is the exchange rate, Y^e is the expected level of real national income and “...” represents other unspecified determinants. Write an MP function in the form r = MP(– – – – –) identifying each of the determinants.

If the central bank targets real national income rather than inflation, what will be the shape of the MP curve?

In a complete JW model, what else would cause the JW curve

(a) to shift to the right:

(b) to shift to the left?