Explain the time-inconsistency problem. What is the likely outcome of discretionary policy? What are the solutions to the time-inconsistency problem?
What will be an ideal response?
With policy discretion, policymakers have an incentive to attempt to increase output by pursuing expansionary policies once expectations are set. The problem is that this policy results not in higher output, but in higher actual and expected inflation. The solution is to adopt a rule to constrain discretion. Nominal anchors can provide the necessary constraint on discretionary behavior.
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________ increases the supply of dollars in the foreign exchange market
A) An increase in the exchange rate B) A decrease in the exchange rate C) A rise in the expected future exchange rate D) A fall in the interest rate in the U.S. relative to the interest rate in other countries E) A rise in the interest rate in the U.S. relative to the interest rate in other countries
An increase in the money supply
a. reduces interest rates and shifts aggregate demand to the right. b. reduces interest rates and shifts aggregate supply to the right c. raises interest rates and shifts aggregate demand to the right. d. raises interest rates and shifts aggregate supply to the right.
The Skinned Knee Corporation can produce either 300 skateboards each week or 500 snowboards each week. What is their opportunity cost of producing 300 skateboards each week?
A) 300 skateboards B) 200 snowboards C) 500 snowboards D) 800 snowboards
If the money supply grows at 5% and real GDP grows at 6%, the quantity theory predicts the inflation rate will be
A) -1%. B) 1%. C) 1.2%. D) 11%.