ECON 2000 Lecture Notes - Lecture 35: Nominal Rigidity, Neutrality Of Money, Money Supply

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ECON 2000

Lecture 35

 One way economists determine forecasts is by looking at leading

indicators

o Variables that tend to fluctuate in advance of overall economy

 Forecasts differ in part because economists’ opinions differ in terms of

which leading indicators are the most reliable

 Some of the most used leading indicators are:

o New orders, inventory levels, the number of new building permits

issued, stock market indexes, money supply data, the spread

between short-term and long-term interest rates, and consumer

confidence surveys

How the Short Run and the Long Run Differ

 Key difference between the short run and the long run is the behaviour

of prices

o In the long run, prices are flexible and can respond to changes in

supply or demand

o In the short run, prices are sticky at some predetermined level

 Since prices behave differently in short run than in long run, economic

policies have different effects over different time horizons

 For example, if Bank of Canada reduces money supply by 5 percent:

o Long-run prices are reduced by 5% (real variables stay the same –

monetary neutrality

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Document Summary

One way economists determine forecasts is by looking at leading indicators: variables that tend to fluctuate in advance of overall economy. Forecasts differ in part because economists" opinions differ in terms of which leading indicators are the most reliable. Some of the most used leading indicators are: new orders, inventory levels, the number of new building permits issued, stock market indexes, money supply data, the spread between short-term and long-term interest rates, and consumer confidence surveys. How the short run and the long run differ. Since prices behave differently in short run than in long run, economic policies have different effects over different time horizons. In other words, during time of horizon over which prices are sticky, classical dichotomy no longer holds: nominal variables can influence real variables, economy can deviate from the equilibrium predicted by the classical model. The model of aggregate supply and aggregate demand.

Related Questions

Economists forecast future economic conditions by studying variables that tend to fluctuate in advance of the overall economy. The most significant of these variables are known as leading indicators, and they compose the index of leading economic indicators.

Which of the following variables are measured as part of this index? Check all that apply.

The interest rate spread

Consumer expectations

Stock prices

Hours worked by manufacturing workers

Technological advances

True or False: Short-run economic forecasts give the government useful information regarding expected tax revenues, but are not relevant to businesses because they cannot adjust output in the short run.

True

False

Problem Set 5

Complete all questions listed below. Clearly label your answers.

1. What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain.

2. How rapidly has the money supply (M1) grown during the past twelve months? State the rate of growth (use http://www.federalreserve.gov/releases/h6/) and the most recent release, use the seasonally adjusted figures. Calculate the rate of growth across the year by taking the (new amount of M1- old amount of M1)/old amount of M1). Given the state of the economy, should monetary authorities increase or decrease the growth rate of money? Explain why.

3. Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Explain your responses.

4. Compare and contrast the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations. Are the implications of the two theories different in the short run? Are the long-run implications different? Explain.

10. The monetarist program undertaken during the 1979-1982 period resulted in:

A. a reduction in the inertial rate of inflation.

B. a dramatic rise in unemployment.

C. very high-interest rates.

D. all of the above.

E. none of the above.

11. Some economists have suggested replacing the emphasis on controlled money supply as found in monetarism with controlled growth in nominal GDP. Money supply targets, then:

A. would be determined so as to attain the desired nominal GDP level.

B. would be eliminated.

C. could be set arbitrarily.

D. would be settled on following the discovery of an acceptable level of unemployment.

E. all of the above are true.

12. Which of the following is NOT a keystone of monetarism?

A, The money supply is the determinant of nominal GDP growth.

B. Fiscal policy can raise interest rates and thereby raise velocity.

C. Prices and wages are relatively stable.

D.The private sector is relatively stable.

E. All of the above are keystones.

13. It follows from the assumptions of the rational-expectations macroeconomics that:

A. most unemployment is voluntary.

B. monetary policy can work in the short run but not in the long run.

C. fiscal policy is hamstrung because of delays in the legislative process in Congress.

D. all policy that is predictable will be undone by clever citizens.

E. all are true.

14. Which of the following is true according to monetarist theory?

A. The IS curve is quite steep while the LM Curve is relatively flat.

B. Changes in the money supply have their greatest effect on prices.

C. Fiscal policy can do little to improve economic conditions, but much to worsen them.

D. Real GDP stays at or near potential output most of the time.

E. All of the above are true.

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ECON 2000 Lecture Notes - Lecture 35: Nominal Rigidity, Neutrality Of Money, Money Supply

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