« previous next »

Author Question: Explain what role money illusion plays in determining the Fed's ability to affect output in the ... (Read 24 times)

Wadzanai

  • Hero Member
  • *****
  • Posts: 528
on: Jun 30, 2018
Explain what role money illusion plays in determining the Fed's ability to affect output in the short run.
 
  What will be an ideal response?

Question 2

Suppose an economy experiences an increase in inflation. Explain the possible macroeconomic benefits of this increase in inflation.
 
  What will be an ideal response?


swimkari

  • Sr. Member
  • ****
  • Posts: 332
Reply #1 on: Jun 30, 2018
Answer to Question 1

Money illusion refers to a situation where individuals make mistakes about the distinction between nominal and real magnitudes. For example, individuals might be reluctant to accept a reduction in the nominal wage (that would cause a reduction in the real wage) while at the same time would accept a reduction in the real wage when inflation exists and the nominal wage does not change. Money illusion, therefore, might allow a central bank to inflate an economy and, therefore, cause output to rise temporarily.

Answer to Question 2

Answers should include discussions of: seignorage, the option of a negative real interest rate, and money illusion.


Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
« previous next »
 

Did you know?

During pregnancy, a woman is more likely to experience bleeding gums and nosebleeds caused by hormonal changes that increase blood flow to the mouth and nose.

Did you know?

The longest a person has survived after a heart transplant is 24 years.

Did you know?

Looking at the sun may not only cause headache and distort your vision temporarily, but it can also cause permanent eye damage. Any exposure to sunlight adds to the cumulative effects of ultraviolet (UV) radiation on your eyes. UV exposure has been linked to eye disorders such as macular degeneration, solar retinitis, and corneal dystrophies.

Did you know?

Studies show that systolic blood pressure can be significantly lowered by taking statins. In fact, the higher the patient's baseline blood pressure, the greater the effect of statins on his or her blood pressure.

Did you know?

Autoimmune diseases occur when the immune system destroys its own healthy tissues. When this occurs, white blood cells cannot distinguish between pathogens and normal cells.

The Role of Microfilaments in Cell Movement-Showing Cause and Effect in Biology 2 The Role of Microfilaments in Cell Movement-Showing Cause and Effect in Biology 2
Our species’ ability to form social bonds and be loyal and cooperative within our “tribe” may ... Our species’ ability to form social bonds and be loyal and cooperative within our “tribe” may ...
Phospholipids’ Role in Your Cell Membranes Phospholipids’ Role in Your Cell Membranes
Sodium’s chief role is regulation of fluid balance Sodium’s chief role is regulation of fluid balance
The Economics of Money, Banking and Financial Markets, Business School Edition The Economics of Money, Banking and Financial Markets, Business School Edition
Social scientists have not done well at devising theories to explain lovely romantic moments Social scientists have not done well at devising theories to explain lovely romantic moments
Video: The Lac Operon in E. Coli

For a complete list of videos, visit our video library