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What effect would changes in the nominal interest rate have on the economy? What effect would an aggregate demand shock have on the economy?
Suppose you are appointed to chair the Federal Reserve. What monetary policy action would you take in this case and why? Refer to the IS-MP diagram.
Explain how changes in this overnight nominal rate influence longer-term real interest rates, and thus investment.
Why do central banks often exercise monetary policy by targeting an interest rate rather than by setting particular levels of the money supply?
What policy change did Paul Volcker implement, and how did it affect interest rates, output, and inflation over time?
What is the Phillips curve? What role does it play in the short-run model? Explain the role played by each term in the equation for the Phillips curve.
What is the relevance of Milton Friedman's phrase long and variable lags to this chapter?
What is the economic justification for the sticky inflation assumption? What role does this assumption play in the short-run model?
Show how to think about this event using the IS curve. Explain how actual output, potential output, and short-run output are affected in the short run, and why.
Which aggregate demand parameter is affected? How and why is it affected? How does this increase affect the graph of the IS curve?
Consider the following changes in the macroeconomy. Show how to think about them using the IS curve, and explain how and why GDP is affected in the short run.
What are three insights you gained from studying the micro foundations of the IS curve?
What are some examples of changes in the economy that would lead to movements along the IS curve? What are some changes that would shift the IS curve?
What role does the IS curve play in our short-run model? What kind of economic questions does it allow us to analyze?
What is the leverage ratio of the two companies you've chosen? For each $100 of assets, how much is financed with equity and how much with debt?
What about a key policy interest rate set by European Central Bank (ECB)? An extremely helpful resource for this exercise is ECB's Statistical Data Warehouse.
What does this tell you about how the economy has evolved in response to the financial crisis?
How severe was the Great Recession? What pieces of economic data would you cite to support your answer?
By roughly how much did housing prices fall during the financial crisis? What about the stock market?
Suppose the economy has a natural rate of unemployment of 6%. According to Okun's law, what unemployment rates would we expect to see in this economy?
Explain how the two economies respond differently to a boom and to a slump. What are some factors that might influence the slope of the Phillips curve?
What happens if policymakers try to stimulate the economy to keep output above potential by 3% every year?
What shocks appear to be most important in explaining fluctuations in economic activity for the countries you chose? Be sure to document your sources carefully.
What happens to the true amount of short-run output Y? What would be predicted to happen? Has this ever happened to the U.S. economy?