How independent of each other are monetary policy and fiscal policy
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If public opinion surveys show that the majority of Americans regard
inflation as a more serious threat than unemployment:
Does this imply that the majority of Americans would rather be unemployed in a period of stable
prices than employed in a time of rising prices?
If the management of a firm allowed employees to vote on whether the firm should lay off 10% of the
employees or reduce wage rates by 5%, how do you think they would vote? Do you
think the outcome of the vote would depend on whether the employees knew in
advance exactly who would be laid off?
How independent of each other are monetary policy and fiscal policy?
a) Under what circumstances could the federal government run a large budget deficit
without thereby producing an increase in the size of the money stock?
Suppose the Fed determined to run a tight monetary policy, allowing no growth in
commercial bank reserves, at a time when the federal government was trying to
borrow to finance a large budget deficit. What would happen?
Assuming that interest rates are set by the demand for and supply of loanable funds, under
what circumstances could a large increase in federal government borrowing not
produce higher interest rates?
Suppose the Fed tries to prevent the increased government demand for loanable funds from raising interest rates by increasing the supply of loanable funds through and expansion of commercial bank
loans. Will this Fed policy succeed in preventing interest rates from rising? At what point will the Fed’s expansionary policy step up the inflation rate? How will the expectation of a higher rate of inflation cause interest rates to rise?
Suppose that the federal government begins to run a large budget
deficit at a time when many productive resources are idle – factories are
operating far below capacity in most industries and there are surplus supplies
of labor in almost every area of the economy. How might the existence of all
these idle resources prevent even a very large increase in government borrowing
from leading to an increase in interest rates?
……………………..Answer preview……………………….
Inflation is the rise in general prices of goods and services over a specific period of time. Unemployment is a state where people are able and willing to work at the ongoing market prices of labour but they are unable to secure a job. According to the Phillips curve, there is a consistent relationship between inflation and unemployment……………………….
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