If decision makers fail to anticipate the inflationary effects of demand stimulus policies, in the short run the stimulus will
Answer(s): E
Unanticipated inflation, as the result of demand stimulus policies, increases output and employment since the real wage is eroded and the cost of labor declines.
The primary cause of frictional unemployment is
Answer(s): C
Frictional unemployment is the result of a scarcity of information and the search activities of both employers and employees for information that will help them make better employment choices.
What incentives does inflation create in consumers and producers?
Answer(s): B
Inflation causes consumers to spend now, because goods will be more expensive in the future.Conversely, producers will produce goods now, because wages and raw materials prices are expected to rise.Producers will also build up inventories in anticipation of higher future prices.
"Rapid growth in the money supply is the primary cause of inflation. The time period between acceleration in the growth rate of the money supply and an acceleration in inflation is often lengthy (for example, from 12 to 36 months) and difficult to predict." These two statements are
Monetarists believe that monetary instability is the major cause of fluctuations in real GDP and rapid growth of the money supply is the major cause of inflation.Monetarists cite lengthy and unpredictable time lags between the implementation of a monetary policy change and the observation of its primary effects as a justification for not using discretionary monetary policy as a stabilization tool.
The Central Bank increases the money supply by 5%. This was not anticipated by economic participants. The economy is operating below potential. In the long-run, this will cause the aggregate supply curve to _______, the aggregate demand curve to ________, and the price level to ________.
Answer(s): A
In order to determine how each curve changes, think of the effects independently. First the demand curve. The new money supply is effectively new income for consumers, it is irrelevant for this exercise whether this is real or nominal income. An increase in income shifts the demand curve to the right.Next the supply curve. If producers anticipate inflation, this is effectively an increase in their costs. Again, whether this is a nominal or real cost increase is irrelevant. Higher costs cause the supply curve to shift to the left.The directional shift in both curves indicates a higher price level. Note that the quantity demanded/produced is the same. This is because while the increase in income shifts the demand curve, the increase in prices offsets the effect. Similarly, the increase in revenues (due to higher prices) offsets the higher costs for suppliers.
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