MACRO: Policies and Theories Flashcards
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Read the first 7 MACRO: Policies and Theories flashcards as text
The 'sacrifice ratio' in monetary policy refers to:
Answer: The cumulative output loss needed to reduce inflation by one percentage point
The sacrifice ratio measures the economic cost (lost GDP or higher unemployment) required to bring inflation down by one percentage point.
In New Keynesian theory, menu costs and other nominal rigidities are important because they explain why:
Answer: Prices adjust slowly, allowing monetary policy to have real short-run effects
Sticky prices (due to menu costs) mean that monetary policy changes affect real variables in the short run before prices fully adjust.
When a central bank uses quantitative easing (QE), it primarily aims to:
Answer: Purchase long-term assets to lower long-term rates and stimulate borrowing when short-term rates are at zero
QE involves purchasing longer-term securities to push down long-term interest rates and provide additional monetary stimulus at the zero lower bound.
According to the theory of rational expectations, anticipated monetary policy is:
Answer: Ineffective at changing real output because agents adjust wages and prices immediately
If people correctly anticipate policy changes, they adjust behavior immediately, neutralizing any real effects of anticipated monetary policy.
The 'time inconsistency' problem in monetary policy refers to the tendency of central banks to:
Answer: Announce low-inflation targets but then inflate to boost short-run output, undermining credibility
Time inconsistency occurs when the optimal policy ex ante (low inflation commitment) differs from the optimal policy ex post (inflate for growth), damaging credibility.
In the AS-AD framework, which event would cause the long-run aggregate supply (LRAS) curve to shift rightward?
Answer: An improvement in technology that raises potential output
LRAS reflects the economy's productive capacity, which expands with improvements in technology, capital accumulation, or labor force growth.
Which theoretical framework best supports the use of fiscal policy during a liquidity trap, when monetary policy is constrained by the zero lower bound?
Answer: New Keynesian economics
New Keynesian models demonstrate that fiscal multipliers are especially large at the zero lower bound, making fiscal stimulus particularly powerful during liquidity traps.