MACRO: Policies and Theories Flashcards
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The Phillips Curve in the short run illustrates a trade-off between:
Answer: Inflation and unemployment
The short-run Phillips Curve shows that lower unemployment is associated with higher inflation and vice versa.
Milton Friedman argued that the long-run Phillips Curve is vertical at the natural rate of unemployment because:
Answer: Workers eventually adjust their inflation expectations, eliminating the trade-off
Once workers adjust expectations to actual inflation, real wages return to equilibrium and unemployment returns to its natural rate.
Which monetary policy tool is considered the Federal Reserve's primary instrument for implementing policy since the 2000s?
Answer: Open market operations targeting the federal funds rate
The Fed primarily targets the federal funds rate through open market operations (buying and selling Treasury securities).
Expansionary fiscal policy is most effective when the economy is operating:
Answer: Well below potential output with a large recessionary gap
Fiscal stimulus has the greatest real effect when idle resources exist and a recessionary gap means output is below potential.
The concept of 'automatic stabilizers' refers to:
Answer: Government programs that expand spending or cut taxes automatically during recessions without new legislation
Programs like unemployment insurance and progressive taxes automatically inject or withdraw spending from the economy based on economic conditions.
According to monetarists, sustained inflation is primarily caused by:
Answer: Excessive growth in the money supply relative to real output growth
Monetarists, following the quantity theory of money (MV=PQ), argue that inflation results when money supply grows faster than real output.
A central bank pursuing inflation targeting commits to:
Answer: Maintaining a publicly announced inflation rate target and adjusting policy to achieve it
Inflation targeting uses a publicly stated goal (e.g., 2%) to anchor expectations and guide monetary policy decisions.