Author Question: Suppose a presidential candidate makes a statement in a debate whereby he promises that he would ... (Read 241 times)

Jipu 123 · **on:** Jun 29, 2018

Suppose a presidential candidate makes a statement in a debate whereby he promises that he would encourage the Fed to permanently lower the unemployment rate to 3.

His opponent claims that this type of policy idea is mired in the 1960s and would only cause inflation. Explain what the opponent means.

Question 2

In a public corporation, asymmetric information often results in a principal-agent problem between top management and ownership. What information would help to prevent this principal-agent problem?

What will be an ideal response?

bigcheese9 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

An increase in the money supply will raise GDP above potential GDP and lower the unemployment rate below the natural rate in the short run. To attempt to keep the level of GDP above potential continuously in the long run, and subsequently keep the unemployment rate permanently below the natural rate, the Fed would have to continuously keep raising the money supply. This would be inflationary.

Answer to Question 2

Top managers know more about how the company is run than do the firm's shareholders. The principal-agent problem might be overcome if shareholders had all the information about the company and about the consequences of the actions taken by the firm's managers that the managers themselves possess.