36.1 First,
imagine that both input and output prices are fixed in the economy.
What does the aggregate supply curve look like? If AD decreases in this
situation, what will happen to equilibrium output and the price
level? Next, imagine that input prices are fixed, but output prices are
flexible. What does the aggregate supply curve look like? In this case,
if AD decreases, what will happen to equilibrium output and the price
level? Finally, if both input and output prices are fully flexible, what
does the aggregate supply curve look like? In this case, if AD
decreases, what will happen to equilibrium output and the price level?
(To check your answers, review Figures 29.3, 29.4, and 29.5 in Chapter
29).
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36.2 According
to mainstream economists, what is the usual cause of macroeconomic
instability? What role does the spending-income multiplier play in
creating instability? How might adverse aggregate supply factors cause
instability, according to mainstream economists?
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36.3 What
is an efficiency-wage? How might payment of an above-market wage reduce
shirking by employees and reduce worker turnover? How might efficiency
wages contribute to downward wage inflexibility, at least for a time,
when aggregate demand declines?
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36.4 How might relationships between so-called insiders and outsiders contribute to downward wage inflexibility?
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36.5 Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle.
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36.6 Craig
and Kris were walking directly toward each other in a congested store
aisle. Craig moved to his left to avoid Kris, and at the same time Kris
moved to his right to avoid Craig. They bumped into each other. What
concept does this example illustrate? How does this idea relate to
macroeconomic instability?
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36.7 State
and explain the basic equation of monetarism. What is the major cause
of macroeconomic instability, as viewed by monetarists?
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36.8 Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?
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36.9 Use
an AD-AS graph to demonstrate and explain the price- level and
real-output outcome of an anticipated decline in aggregate demand, as
viewed by RET economists. (Assume that the economy initially is
operating at its full-employment level of output.) Then demonstrate and
explain on the same graph the outcome as viewed by mainstream
economists.
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36.10 Explain
the difference between "active" discretionary fiscal policy advocated
by mainstream economists and “passive” fiscal policy advocated by new
classical economists. Explain: “The problem with a balanced-budget
amendment is that it would, in a sense, require active fiscal policy—but
in the wrong direction—as the economy slides into recession.”
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36.11 Place
“MON,” “RET,” or “MAIN” beside the statements that most closely reflect
monetarist, rational expectations, or mainstream views, respectively:a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.b. Downward wage inflexibility means that declines in aggregate demand can cause long-lasting recession.c. Changes in the money supply M increase PQ; at first only Q rises, because nominal wages are fixed, but once workers adapt their expectations to new realities, P rises and Q returns to its former level.d. Fiscal and monetary policies smooth out the business cycle.e. The Fed should increase the money supply at a fixed annual rate.
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36.12 You
have just been elected president of the United States, and the present
chairperson of the Federal Reserve Board has resigned. You need to
appoint a new person to this position, as well as a person to chair your
Council of Economic Advisers. Using Table 36.1 and your knowledge of
macroeconomics, identify the views on macro theory and policy you would
want your appointees to hold. Remember, the economic health of the
entire nation— and your chances for reelection—may depend on your
selections.
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36.13 LAST WORD
Compare and contrast the Taylor rule for monetary policy with the
older, simpler monetary rule advocated by Milton Friedman.
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