Are the goals of monetary policy in harmony or in conflict (a) in the long run and (b) in the short run?
What will be an ideal response?
The monetary policy goals are essentially in harmony for the long run. In the long run, stable prices will bring about maximum employment because firms and households can make the best possible decisions against a backdrop of stable prices. With stable prices, the inflation rate is low—perhaps even zero if prices are precisely stable. The nominal interest rate equals the real interest rate plus the (expected) inflation rate. If the inflation rate is low, then the nominal interest rate will be as low as possible. In the short run, however, the monetary policy goals might conflict with each other. In the short run, in a recession the Federal Reserve might lower the federal funds rate and increase the growth rate of the quantity of money to combat the recession. The Fed's policy will increase employment and real GDP but also increase the price level and eventually the nominal interest rate.
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Assume that eggnog and cookies are complements. If the price of eggnog goes up, what happens to the demand for cookies?
a. demand for cookies increases b. demand for cookies decreases c. demand for cookies remains unchanged d. the shift in demand will depend on the original price of cookies
Which of the following is not correct?
a. A negative income tax only applies to working people, so it encourages people to get full-time work. b. Supporters advocate the use of the Earned Income Tax Credit as a way to help the working poor. c. A negative income tax subsidizes the incomes of poor people. d. An advantage of a negative income tax is that it is not based on the number of children, so it does not provide incentives for unmarried women to have children.
Entrepreneurship functions better when
What will be an ideal response?
When oligopolistic firms in an industry form a cartel, then it is most likely that
A. both industry output and prices will decrease. B. both industry output and prices will increase. C. industry output will decrease while prices will increase. D. industry output will increase while prices will decrease.