Author Question: Suppose the output gap is zero, and policy makers wish to reduce the inflation rate from 10 percent ... (Read 69 times)

ts19998 · **on:** Jun 30, 2018

Suppose the output gap is zero, and policy makers wish to reduce the inflation rate from 10 percent to 5 percent. Which of these policies seems best?

A) contractionary policies to reduce output at least 5 percent below potential output
B) a convincing declaration of the inflation rate target, so that expected inflation falls to 5 percent
C) no policy action; inflation will fall on its own, eventually
D) no policy action; inflation will converge to its long-run rate, regardless of policy
E) price and wage controls to counteract their stickiness

Question 2

In the new classical model, an unanticipated increase in the money stock would cause

a. the price level and the level of real output to rise.
b. the price level to rise with no effect on real output.
c. real output to rise with no effect on the price level.
d. no change in the price level or level of real output.