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how to calculate the slope of a straight line is found in the Section I Appendix.) This is the simplest case, but the production possibilities curve model can also be used to examine situations in which opportunity costs change as the mix of output changes. Figure 3.2 illustrates a different assumption, a case in whic... |
), producing at which point today will result in the largest outward shift of the PPC in the future? a. A b. B c. C d. D e. E Answer (6 points) 1 point: Yes 1 point: The PPC is concave (bowed outward), so with each additional unit of butter produced, the opportunity cost in terms of gun production (indicated by the slo... |
off when they each specialize in what they are good at and trade with each other. It’s a good idea for Tom to catch the fish for both of them, because his opportunity cost of a fish is only 3⁄4 of a coconut not gathered versus 2 coconuts for Hank. Correspondingly, it’s a good idea for Hank to gather coconuts for both ... |
t producing one more ton of pork costs fewer aircraft in the f i g u r e 4.3 Comparative Advantage and International Trade (a) U.S. Production Possibilities Curve (b) Canadian Production Possibilities Curve Quantity of aircraft 1,500 1,000 U.S. consumption without trade U.S. consumption with trade U.S. production with ... |
model: an increase in resources and improved technology. 13. There are gains from trade: by engaging in the trade of goods and services with one another, the members of an economy can all be made better off. Underlying gains from trade are the advantages of specialization, of having individuals specialize in the tasks ... |
et consists of fried chicken and corn-on-the-cob, and each is self-sufficient, raising their own chickens and growing their own corn. Explain the conditions under which each of the following statements would be true. a. The two families are made better off when the Hatfields specialize in raising chickens, the McCoys s... |
rawing Curves (a) Positive Linear Relationship (b) Negative Linear Relationship Number of sodas sold 70 60 50 40 30 20 10 0 (80, 70) E (60, 50) D (40, 30) C Horizontal intercept (10, 0) B 10 30 20 50 Outside temperature (degrees Fahrenheit) 80 60 70 40 Number of hot drinks sold 70 60 50 40 30 20 10 0 J (0, 70) Vertical... |
, as in panel (b), is said to have positive decreasing slope. When we calculate the slope along these nonlinear curves, we obtain different values for the slope at different points. How the slope changes along the curve determines the curve’s shape. For example, in panel (a) of Figure A.4, the slope of the curve is a p... |
various heights or lengths. This bar graph shows the percent change in the number of unemployed workers between 2001 and 2002, indicated separately for White, Black or African-American, and Asian workers. Source: Bureau of Labor Statistics. Changes in the Number of Unemployed by Race (2001–2002) Percent change in numb... |
ould want to buy at a number of different prices. Such a table is known as a demand schedule. This, in turn, can be used to draw a demand curve, which is one of the key elements of the supply and demand model. The Demand Schedule and the Demand Curve A demand schedule is a table showing how much of a good or service co... |
hift of the demand curve: at any given price, consumers demand a smaller quantity of the good or service than before. This is shown by the leftward shift of the original demand curve D1 to D3. What caused the demand curve for coffee beans to shift? We have already mentioned two reasons: changes in population and a chan... |
arket is the sum of the quantities demanded by Darla and Dino. The market demand curve shows how the combined quantity demanded by all consumers depends on the market price of that good. (Most of the time, when economists refer to the demand curve, they mean the market demand curve.) The market demand curve is the hori... |
and so on. In the same way that a demand schedule can be represented graphically by a demand curve, a supply schedule can be represented by a supply curve, as shown in Figure 6.1. Each point on the curve represents an entry from the table. Suppose that the price of coffee beans rises from $1 to $1.25; we can see that t... |
production for crude oil. Changes in Technology When economists talk about “technology,” they don’t necessarily mean high technology—they mean all the methods people can use to turn inputs into useful goods and services. In that sense, the whole complex sequence of activities that turn corn from an Iowa farm into corn... |
ll equilibrium. Imagine a busy afternoon at your local supermarket; there are long lines at the checkout counters. Then one of the previously closed registers opens. The first thing that happens is a rush to the newly opened register. But soon enough things settle down and shoppers have rearranged themselves so that th... |
any strawberry farmers open temporary roadside stands c. during harvest season, even though prices are usually low at that time. Immediately after the school year begins, fewer young people are available to work. Fast-food chains must raise wages, which represent the price of labor, to attract workers. d. Many construc... |
ns is higher and the equilibrium quantity is lower than before. This may be stated as a general principle: When supply of a good or service decreases, the equilibrium price of the good or service rises and the equilibrium quantity of the good or service falls. What happens to the market when supply increases? An increa... |
will decrease. e. The equilibrium quantity may increase, decrease, or stay the same. Tackle the Test: Free-Response Questions 1. Draw a correctly labeled graph showing the SUV market in equilibrium. On your graph, show the effect on equilibrium price and quantity in the market for SUVs if the price of gasoline increas... |
the apartments that are available: people who badly need a place to live may not be able to find an apartment, while some apartments may be occupied by people with much less urgent needs. In the case shown in Figure 8.2, 2.2 million people would like to rent an apartment at $800 per month, but only 1.8 million apartmen... |
s that government officials often do not understand supply and demand analysis! It is a great mistake to suppose that economic policies in the real world are always sensible or well informed. Price Floors Sometimes governments intervene to push market prices up instead of down. Price floors have been widely legislated ... |
an this be? Isn’t high quality a good thing? Yes, but only if it is worth the cost. Suppose that suppliers spend a lot to make goods of very high quality but that this quality isn’t worth much to consumers, who would rather receive the money spent on that quality in the form of a lower price. This represents a missed o... |
New York City limits the number of taxi rides that can be sold by limiting the number of taxis to only those who hold medallions. There are many other cases of quantity controls, ranging from limits on how much foreign currency (for instance, British pounds or Mexican pesos) people are allowed to buy to the quantity o... |
s opportunity cost of not renting out his medallion. That is, the $2 quota rent is now the rental income he forgoes by driving his own taxi. In effect, Sunil is in two businesses—the taxidriving business and the medallion-renting business. He makes $4 per ride from driving his taxi and $2 per ride from renting out his ... |
hen economists talk of changes in demand, they mean shifts of the demand curve—a change in the quantity demanded at any given price. An increase in demand causes a rightward shift of the demand curve. A decrease in demand causes a leftward shift. 4. There are five main factors that shift the demand curve: ■ A change in... |
d for garlic to decrease and the price of garlic to fall. Therefore, the ultimate effect of the study on the price of garlic is uncertain.” 6. In Rolling Stone magazine, several fans and rock stars, including Pearl Jam, were bemoaning the high price of concert tickets. One superstar argued, “It just isn’t worth $75 to ... |
n response to social unrest over high levels of involuntary unemployment, the French government instituted a 35-hour workweek—a worker could not work more than 35 hours per week even if both the worker and employer wanted it. The motivation behind this policy was that if current employees worked fewer hours, employers ... |
) in which households buy the goods and services they want from firms. This produces a flow of goods and services to the households and a return flow of money to firms. On the other side, there are factor markets in which firms buy the resources they need to produce goods and services. The best known factor market is t... |
company that is building a new factory will buy investment goods—machinery like stamping presses and welding robots—from companies that manufacture these items. It will also accumulate an inventory of finished cars in preparation for shipment to dealers. Inventories, then, are goods and raw materials that 105 Investme... |
hat types of spending make up GDP? Look again at the markets for goods and services in Figure 10.2, and you will see that one source of sales revenue for firms is consumer spending. Let’s denote consumer spending with the symbol C. Figure 10.2 shows three other components of sales: sales of investment goods to other bu... |
ich of the following components makes up the largest percentage of GDP measured by aggregate spending? a. consumer spending b. c. government purchases of goods and services d. exports imports e. investment spending . Draw a correctly labeled circular-flow diagram showing the flows of funds between the markets for goods... |
than nominal GDP in 2001, reflecting the fact that prices were in general higher in 2005 than in 2001. Real GDP in 2009 t a b l e 11.2 Nominal versus Real GDP in 2001, 2005, and 2009 Nominal GDP (billions of current dollars) Real GDP (billions of 2005 dollars) 2001 2005 2009 $10,286 12,683 14,259 Source: Bureau of Eco... |
ing in f i g u r e 12.1 The U.S. Unemployment Rate, 1948–2010 The unemployment rate has fluctuated widely over time. It always rises during recessions, which are shown by the shaded bars. It usually, but not always, falls during periods of economic expansion. Source: Bureau of Labor Statistics; National Bureau of Econo... |
the unemployment rate among African - American teenagers was 31.2%. As a result, even during periods of low overall unemployment, unemployment remains a serious problem for some groups. Source: Bureau of Labor Statistics. Unemployment rate 35% 30 25 20 15 10 5 0 31.2% 14.4% 7.7% 4.7% Overall AfricanAmerican White teen... |
rmation for a hypothetical economy presented in the following table to answer questions 2, 3, and 4. Population age 16 and older = 200,000 Labor Force = 100,000 Number of people working part time = 20,000 Number of people working full time = 70,000 2. What is the labor force participation rate? a. 70% b. 50% c. 20% Tac... |
e wage rate is, for some reason, persistently above WE. Several factors can lead to a wage rate in excess of WE, the most important being minimum wages, labor unions, efficiency wages, and the side effects of government policies. Minimum Wages As explained in Module 8, a minimum wage is a governmentmandated floor on th... |
rcentage of women in the labor force surged in the 1970s. By the end of the 1990s, however, the share of women in the labor force had leveled off and the percentage of workers under 25 had fallen sharply. As a result, the labor force as a whole is more experienced today than it was in the 1970s, one likely reason that ... |
rrency conversion happened in 2002, when France, like a number of other European countries, replaced its national currency, the franc, with the new Pan -European currency, the euro. People turned in their franc coins and notes, and received euro coins and notes in exchange, at a rate of precisely 6.55957 francs per eur... |
May 2008, official estimates of the inflation rate reached 1,694,000%. Menu costs are also present in low - inflation economies, but they are not severe. In low-inflation economies, businesses might update their prices only sporadically—not daily or even more frequently, as is the case in high -inflation or hyperinfla... |
e 16% 14 12 10 8 6 4 2 Unemployment rate 12% 10 8 6 Unemployment rate Inflation rate 1978 1980 1982 1984 1986 1988 Year 139 M o d u l e 14 AP R e v i e w Solutions appear at the back of the book. Check Your Understanding 1. The widespread use of technology has revolutionized the banking industry, making it much easier ... |
the overall price level in the United States is the consumer price index (often referred to simply as the CPI), which is intended to show how the cost of all purchases by a typical urban family has changed over time. It is calculated by surveying market prices for a market basket that is constructed to represent the co... |
ine what they buy and where they shop, and a carefully selected sample of stores are surveyed to get representative prices. As explained in the preceding FYI, however, there is still considerable controversy about whether the CPI accurately measures inflation. A small change in the CPI has large consequences for those ... |
DP deflator, which measures the price level by calculating the ratio of nominal to real GDP times 100. S u m m a r y 149 Key Terms National income and product accounts, p. 102 Final goods and services, p. 106 Frictional unemployment, p. 127 National accounts, p. 102 Intermediate goods and services, p. 106 Structural un... |
How did it change from the month before? How did it change over the last year? 10. The accompanying table provides the annual real GDP (in billions of 2000 dollars) and nominal GDP (in billions of dollars) for the United States. Section 3 Summary 2002 2003 2004 2005 2006 Real GDP (billions of 2000 dollars) $10,048.8 10... |
n had been feeding on itself: people were buying houses as investments, then selling them to other people who were also buying houses as investments, and the prices had risen to levels far beyond what people who actually wanted to live in houses were willing to pay The abrupt collapse of the housing market pulled the l... |
P is called an autonomous change in aggregate spending. It’s autonomous—which means “self -governing”—because it’s the cause, not the result, of the chain reaction we’ve just described. Formally, the multiplier is the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size... |
r approximately 0.53. Source: Bureau of Labor Statistics. Consumer spending $100,000 80,000 60,000 40,000 20,000 0 cf $50,000 100,000 150,000 200,000 Current disposable income 163 The aggregate consumption function is the relationship for the economy as a whole between aggregate current disposable income and aggregate ... |
spending, booms and busts in investment spending tend to drive the business cycle. In fact, most recessions originate as a fall in investment spending. Figure 16.5 illustrates this point; it shows the annual percent change of investment spending and consumer spending in the United States, both measured in 2005 dollars,... |
ousing boom was part of a broader housing boom in the country as a whole. There is little question that this housing boom was caused, in the first instance, by low interest rates. The figure shows the interest rate on 30-year home mortgages—the traditional way to borrow money for a home purchase—and the number of housi... |
. Aggregate price level (GDP deflator, 2005 = 100) 7.9 5.0 0 A movement down the AD curve leads to a lower aggregate price level and higher aggregate output. 1933 Aggregate demand curve, AD $716 950 Real GDP (billions of 2005 dollars) goods and services demanded would have been $950 billion in 2005 dollars instead of $... |
cal capital is relatively small, . . . . . . aggregate demand increases. If the existing stock of physical capital is relatively large, . . . . . . aggregate demand decreases. If the government increases spending or cuts taxes, . . . . . . aggregate demand increases. If the government reduces spending or raises taxes, ... |
in prices wasn’t an accident. Between 1929 and 1933, the U.S. economy was moving down its aggregate supply curve, which shows the relationship between the economy’s aggregate price level (the overall price level of final goods and services in the economy) and the total quantity of final goods and services, or aggregat... |
rve shifts rightward from SRAS1 to SRAS2, and the quantity of aggregate output supplied at any given aggregate price level rises. curve. Aggregate supply increases when producers increase the quantity of aggregate output they are willing to supply at any given aggregate price level. To understand why the short -run agg... |
price level (GDP deflator, 2005 = 100) 15.0 A fall in the aggregate price level… 7.5 0 Long-run aggregate supply curve, LRAS …leaves the quantity of aggregate output supplied unchanged in the long run. Potential output, YP $800 Real GDP (billions of 2005 dollars output supplied that would exist if all prices, including... |
2 reflected both movements along and shifts of the short -run aggregate supply curve. M o d u l e 18 AP R e v i e w Solutions appear at the back of the book. Check Your Understanding 1. Determine the effect on short -run aggregate supply of each of 2. Suppose the economy is initially at potential output and the the fol... |
P2 P1 E2 ...leads to a higher aggregate price level and higher aggregate output. E1 AD1 AD2 Y2 Y1 Real GDP AD2 AD1 Y2 Y1 Real GDP A demand shock shifts the aggregate demand curve, moving the aggregate price level and aggregate output in the same direction. In panel (a), a negative demand shock shifts the aggregate dema... |
lecting a long -run fall in the aggregate price level. The economy is self -correcting in the long run. What if, instead, there was an increase in aggregate demand? The results are shown in Figure 19.6 on the next page, where we again assume that the initial aggregate demand curve is AD1 and the initial short -run aggr... |
tput and high unemployment before it returns to normal. This belief is the background to one of the most famous quotations in economics: John Maynard Keynes’s declaration, “In the long run we are all dead.” Economists usually interpret Keynes as having recommended that governments not wait for the economy to correct it... |
owing; funds flow out in the form of government purchases of goods and services and government transfers to households. What kinds of taxes do Americans pay, and where does the money go? Figure 20.2 shows the composition of U.S. tax revenue in 2008. Taxes, of course, are required payments to the government. In the Unit... |
ggregate demand curve, AD1, intersects the SRAS curve. At E1, there is an inflationary gap of Y1 − YP. A contractionary fiscal policy—such as reduced government purchases of goods and services, an increase in taxes, or a reduction in government transfers—shifts the aggregate demand curve leftward. It closes the inflati... |
n and the marginal propensity to consume is 0.5, real GDP falls by $100 billion. This is the result of less production leading to less income, which leads to less consumption, which leads to less production, and so on. Multiplier Effects of Changes in Government Transfers and Taxes Expansionary or contractionary fiscal... |
economists tend to support the use of discretionary fiscal policy only in special circumstances, such as an especially severe recession. 212 fyi About That Stimulus Package . . . In early 2008, there was broad bipartisan agreement that the U.S. economy needed a fiscal stimulus. There was, however, sharp partisan disag... |
potential output. 11. In the AD–AS model, the intersection of the short -run aggregate supply curve and the aggregate demand curve is the point of short -run macroeconomic equilibrium. It determines the short -run equilibrium aggregate price level and the level of short -run equilibrium aggregate output. 12. Economic ... |
icit, the government announces that households will pay much higher taxes beginning next year. d. The government reduces military spending. 8. In Wageland, all workers sign an annual wage contract each year on January 1. In late January, a new computer operating system is introduced that increases labor productivity dr... |
YP? What are some examples of such policies? c. Illustrate the macroeconomic situation in Brittania with a diagram after the successful fiscal policy has been implemented. 25. An economy is in long -run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or... |
lows into the United States were $707 billion. The budget surplus is the difference between tax revenue and government spending when tax revenue exceeds government spending. The budget deficit is the difference between tax revenue and government spending when government spending exceeds tax revenue. The budget balance ... |
and bonds are a partial answer to the problem of liquidity. Banks provide a further way for individuals to hold liquid assets and still finance illiquid investments. To help lenders and borrowers make mutually beneficial deals, then, the economy needs ways to reduce transaction costs, to reduce and manage risk through ... |
do charge fees for their services. These fees are quite small for mutual funds that simply hold a diversified portfolio of stocks, without trying to pick winners. But the fees charged by mutual funds that claim to have special expertise in investing your money can be quite high. Pension Funds and Life Insurance Compan... |
ious roles money plays and the many forms it takes in the economy • How the amount of money in the economy is measured Money is any asset that can easily be used to purchase goods and services. Currency in circulation is cash held by the public. Checkable bank deposits are bank accounts on which people can write checks... |
obacco as money and settlers in the Northeast used “wampum,” a type of clamshell. Later in American history, commodity -backed paper money came into widespread use. But this wasn’t paper money as we now know it, issued by the U.S. government and bearing the signature of the Secretary of the Treasury. Before the Civil W... |
learn in this Module: • Why a dollar today is worth more than a dollar a year from now • How the concept of present value can help you make decisions when costs or benefits come in the future Module 24 The Time Value of Money The Concept of Present Value Individuals are often faced with financial decisions that will h... |
la for present value. Let’s call $V the amount of money you need to lend today at an interest rate of r in order to have $1 in two years. So if you lend $V today, you will receive $V × (1 + r) in one year. And if you re-lend that sum for another year, you will receive $V × (1 + r) × (1 + r) = $V × (1 + r)2 at the end o... |
p substantial quantities of liquid assets on hand. In the modern U.S. banking system, these assets take the form either of currency in the bank’s vault or deposits held in the bank’s own account at the Federal Reserve. As we’ll see shortly, the latter can be converted into currency more or less instantly. Currency in b... |
esponse to that experience and similar experiences in other countries, the United States and most other modern governments have established a system of bank regulations that protects depositors and prevents most bank runs. Bank Regulation Should you worry about losing money in the United States due to a bank run? No. A... |
to the 248 Excess reserves are a bank’s reserves over and above its required reserves. The monetary base is the sum of currency in circulation and bank reserves lending bank itself. In reality, some of these loaned funds may be held by borrowers in their wallets and not deposited in a bank, meaning that some of the lo... |
10%. Trace out how this leads to an expansion in bank deposits. 4. Take the example of Silas depositing his $1,000 in cash into First Street Bank and assume that the required reserve ratio is 10%. But now assume that each recipient of a bank loan keeps half the loan in cash and deposits the rest. Trace out the resultin... |
rve much longer terms. For example, William McChesney Martin was chair of the Fed from 1951 until 1970. Alan Greenspan, appointed in 1987, served as the Fed’s chair until 2006. The 12 Federal Reserve Banks each serve a region of the country, known as a Federal Reserve district, providing various banking and supervisory... |
only to wealthy individuals and institutions. Hedge funds are virtually unregulated, allowing them to make much riskier investments than mutual funds, which are open to the average investor. Using vast amounts of leverage— that is, borrowed money—in order to increase its returns, LTCM used sophisticated computer models... |
Reserve Federal Reserve System? I. the bank panic of 1907 II. the Great Depression III. the savings and loan crisis of the 1980s a. I only b. II only c. III only d. I and II only I, II, and III e. 260 System and the federal government? a. the Federal Reserve Board of Governors b. the 12 regional Federal Reserve Banks c... |
been a formula for disastrous levels of inflation. The two panels of Figure 27.2 show the changes in the financial position of both the Fed and commercial banks that result from open -market operations. When the Fed buys U.S. Treasury bills from a commercial bank, it pays by crediting the bank’s reserve account by an a... |
ant to make a small purchase. In other words, the convenience of keeping some cash in your wallet is more valuable than the interest you would earn by keeping that money in the bank. Even holding money in a checking account involves a trade-off between convenience and earning interest. That’s because you can earn a hig... |
ople the relevant question in deciding how much money to hold is whether to put the funds in the form of other assets that can be turned fairly quickly and easily into money. Stocks don’t fit that definition because there are significant broker’s fees when you sell stock (which is why stock market investors are advised... |
the actual money sup- . This means that at point L, the public wants to shift some of its wealth out of inply, M terest -bearing assets such as high-denomination CDs (which aren’t money) into money. This has two implications. One is that the quantity of money demanded is more than the quantity of money supplied. The ot... |
t × 100 A business will want a loan when the rate of return on its project is greater than or equal to the interest rate. So, for example, at an interest rate of 12%, only businesses with projects that yield a rate of return greater than or equal to 12% will want a loan. The demand curve in Figure 29.1 shows that if th... |
d investors lost confidence, causing the inflow of funds to dry up. As we’ve already seen, the United States has received large capital inflows in recent years, with much of the money coming from China and the Middle East. Those inflows helped fuel a big increase in residential investment spending— newly constructed ho... |
S2; and to a fall in the interest rate, from r1 to r2. As a result, the new equilibrium interest rate in the loanable funds market matches the new equilibrium interest rate in the money market at r2. 284 changes in savings. Panel (a) represents the liquidity preference model of the interest rate. MS1 and MD1 are the in... |
ertical axis labeled “Interest rate” or “r” 1 point: Horizontal axis labeled “Quantity of loanable funds” 1 point: Downward sloping demand curve for loanable funds (labeled) 1 point: Upward sloping supply curve for loanable funds (labeled) 1 point: Equilibrium quantity of loanable funds shown on horizontal axis below w... |
e Federal Reserve can change the interest rate in the short run by shifting the money supply curve. In practice, the Fed uses open -market operations to achieve a target federal funds rate, which other shortterm interest rates generally follow. 23. The hypothetical loanable funds market shows how loans from savers are ... |
posits-only system? a. The required reserve ratio is 25%, and a depositor withdraws $700 from his checkable bank deposit. b. The required reserve ratio is 5%, and a depositor withdraws $700 from his checkable bank deposit. c. The required reserve ratio is 20%, and a customer deposits $750 to her checkable bank deposit.... |
iscal Policy: Deficits and the Public Debt In Module 20 we discussed how discretionary fiscal policy can be used to stabilize the economy in the short run. During a recession, an expansionary fiscal policy—raising government spending, lowering taxes, or both—can be used to shift the aggregate demand curve to the right.... |
t annually? Most economists don’t think so. They believe that the government should only balance its budget on average—that it should be allowed to run deficits in bad years, offset by surpluses in good years. They don’t believe the government should be forced to run a balanced budget every year because this would unde... |
ll have a rising debt–GDP ratio when debt grows faster than GDP. Panel (a) of Figure 30.5 shows Japan’s budget deficit as a percentage of GDP, and panel (b) shows Japan’s debt–GDP ratio, both since 1990. As we have already mentioned, Japan began running large deficits in the early 1990s, a by -product of its effort to ... |
to pay debts to court. The court, in turn, can seize the debtors’ assets and force them to pay part of future earnings to their creditors. But when a country defaults, it’s different. Its creditors can’t send in the police to seize the country’s assets. They must negotiate a deal with the country for partial repayment... |
nterest rate, r An open-market sale . . . MS2 MS1 E1 E2 M1 M2 MD Quantity of money . . . drives the interest rate up. rT r1 E2 E1 M2 M1 MD Quantity of money The Federal Reserve sets a target for the federal funds rate and uses open -market operations to achieve that target. In both panels the target rate is rT. In pane... |
e from 1985 to 2009. With the exception of 2009, the Taylor rule does a pretty good job at predicting the Fed’s actual behavior—better than looking at either the output gap alone or the inflation rate alone. Furthermore, the direction of changes in interest rates predicted by an application of the Taylor rule to moneta... |
netary neutrality and its relationship to the long-term economic effects of monetary policy Module 32 Money, Output, and Prices in the Long Run In the previous module we discussed how expansionary and contractionary monetary policy can be used to stabilize the economy. The Federal Reserve can use its monetary policy to... |
on to the increase in the money supply, leading to an increase in money demand at any given interest rate in proportion to the increase in the aggregate price level, as shown by the shift from MD1 to MD2. The result is that the quantity of money demanded at any given interest rate rises by the same amount as the quanti... |
he long run to a change in the aggregate price level, P, that leaves the real quantity of money, M/P, at its original level. As a result, there is no long-run effect on aggregate demand or real GDP. For example, when Turkey dropped six zeros from its currency, the Turkish lira, in January 2005, Turkish real GDP did not... |
icits during the Civil War. And there have been many occasions in history when governments turned to their printing presses as a crucial source of revenue. According to the usual scenario, a government finds itself running a large budget deficit—and lacks either the competence or the political will to eliminate this de... |
lation, and policies that reduce inflation tend to depress the economy. This creates both temptations and dilemmas for governments. Imagine yourself as a politician facing an election in a year, and suppose that inflation is fairly low at the moment. You might well be tempted to pursue expansionary policies that will p... |
t rate. Our next step in understanding the temptations and dilemmas facing governments is to show that there is a short-run trade-off between unemployment and inflation—lower unemployment tends to lead to higher inflation, and vice versa. The key concept is that of the Phillips curve. The origins of this concept lie in... |
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