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Definition
| an activist policy in pursuit of a high employment target |
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| constant-money-growth-rate rule |
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Definition
| a policy rule advocated by monetarists, whereby the Federal Reserve keeps the money supply growing at a constant rate |
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| inflation that occurs because of the push by workers to obtain higher wages |
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| inflation that results when policymakers pursue policies to shift the aggregate demand curve to the right |
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| government budget constraint |
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Definition
| the requirement that the government budget deficit equal the usm of the change in the monetary base and the change in government bonds held by the public |
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| a method of financing government spending whereby the government debt issued to finance government spending whereby the government debt issued to finance government spending is removed from the hands of the public and is replaced by high-powered money |
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| another term used to describe monetizing the debt |
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| the idea that when the government runs defecits and issues bonds, the public recognizes that it will be subject to higher taxes in the future to pay off these bonds |
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| what caused hyperinflation in Germany after World War I? |
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Definition
| rapid money supply growth |
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| why did the German government pursue rapid money supply growth? |
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Definition
| the German government needed to make large reparation payments, and it was burdened by large reconstruction costs following World War I. it was politically unpopular to raise taxes and the amount of revenue needed exceeded the German government's capacity to borrow. |
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| how does the eveidence of Germany's pursuit of rapid money supply growth rule out the possibility of reverse causation? |
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Definition
| the rapid money growth in Germany was clearly a response to exogenous events. |
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suppose that government spending is $500 billion, tax revenue is $300 billion, and the change in government bonds held by the public is $10 billion.
calcualate the government budget deficit and the change in the monetary base. |
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Definition
DEF=$200 billion
(delta)MB=$50 billion |
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suppose that government spending is $500 billion, tax revenue is $300 billion, and the change in government bonds held by the public is $10 billion.
explain why your calculation in the government budget deficit and the change in the monetary base does not imply that Congress and the president can simply print money to finance the government budget defecit. |
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Definition
| the change in the monetary base to finance the deficit is a two-step process. first Congress and the president (through the Treasury) issue bonds to finance the deficit. the the Fed buys those bonds from the public increasing the monetary base. in the United States as well as many other countries, the decision by the central bank to purchase bonds from the public (and therefore monetize the debt) is independent of the decision of Congress and the president to run a budget deficit. |
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| under what circumstances are government budget deficits inflationary? |
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Definition
| a deficit can be the source of a sustained inflation only if it is persistent rather than temporary and if the government finances it by creating money rather than by issuing bonds to the public. |
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| were government deficits the likely cause of inflation in the United States between 1960 and 1980? why or why not? |
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Definition
| government budget deficits were not the likely cause of inflation because government debt relative to GDP was acutally declining between 1960 and 1980. |
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| did the american economy experience demand-pull or cost-push inflation between 1965 and 1973? what evidence supports your answer? |
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Definition
| the American economy experienced demand-pull inflation between 1965 and 1973. this is supported by the fact that the unemployment rate was below the natural rate of unemployment for most of that time period. |
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| did the American economy experience demand-pull or cost-push inflation between 1975 and 1980? what evidence supports you answer? |
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Definition
| the American economy experienced cost-push inflation between 1975 and 1980. this is supported by the fact that the unemployment rate was above the natural rate of unemployment for most of that time period. |
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| under what circumstances would an activist policy be preferable? why? |
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Definition
| acitivist policy is preferable if the wage and price adjustment process is extremely slow because it would keep the economy closer to the natural rate level of output Yn. |
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Term
| under why circumstances would a nonactiviest policy be preferable? |
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Definition
| nonactivist policy is preferable is the wage and price adjustment process is rapid because an activist policy in this situation would create excess volatility. |
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Term
| what is the difference between a one-time increase in the price level and inflation? |
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Definition
| inflation is when chages in the price level are repeated for a substantial period of time. |
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Term
| why is it not possible for continual increases in government spending or continual tax cuts to cause inflation? |
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Definition
| government spending cannot increase continually--there is a natural limit; government spending cannot exceed 100% of GDP. similarly, taxes cannot be reduced indefinitely because eventually they would hit zero. |
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| what causes high inflation? |
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Definition
| high money growth causes high inflation. |
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| under what circumstances will the pursuit of an employment target by policymakers lead to inflation? |
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Definition
| when the employment target is too high, meaning that policymakers attempt to push unemployment below the natural rate, inflation results. |
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| how would you distinguish between cost-push and demand-pull inflation by looking at the unemployment rate? |
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Definition
| with cost-push inflation, the unemployment rate is above the natural rate of unemployment. with demand-pull inflation, the unemployment rate is below the natural rate of unemployment. |
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| why do governments frequently finance persistent deficits by creating money? |
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Definition
| because it is politically unpopular to increase taxes to finance government expenditures an/or the government does not have access to well-developed money and capital markets. |
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| what is Ricardian equivalence and waht does it imply about the effect of government deficits on the monetary base? |
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Definition
| Ricardian equivalence is the idea that when the government issues bonds to finance a deficit the public recognizes that taxes will increase in the future, and so they save for those taxes by buying the newly issued bonds from the government. since bond demand increases along with bond supply, the interest rate remains unchanged and there is no incentive for the Fed to increase the monetary base in order to keep the interest rate from rising. |
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| of the five lags that prevent policymakers from moving the economy immediately back to full employment, which ones do not apply to monetary policy? why? |
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Definition
| the legislative lag and the implementation lag do not apply to monetary policy because the Fed does not have to pass legislation in order to pursue a policy change and once a policy change has been decided on the Fed can immediately notify the Fed's trading desk to undertake the appropriate open market operations. |
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| under what circumstances will activist policy cause output to overshoot and lead to excess volatility in aggregate output? |
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Definition
| when wage and prices adjust faster than policymakers can shift the aggregate demand curve, activist policy will lead to excess volatility in aggregate output. |
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Term
| explain why the case for nonactivist policy is much stronger if workers' opinion about whether policy is accomodating or nonaccommodating matter to the wage-setting process. |
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Definition
| if workers' expectations about the type of policy matter, and the Fed follows an accommodating policy, workers will come to expect that their wage demands will be met. as a result, workers will continue to ask for higher wages and the aggregate supply curve will continue to shift leftward, which sets up a situation where the Fed will continue to react to the higher wage demands by continually increaseing the money supply, which leads to inflation. if expectations matter, following a nonaccommodating, nonactivist policy will lead to lower inflation. |
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T/F
Historical evidence on inflation and money growth is useful becuase it can help rule out the possibility of reverse causation. |
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Definition
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High money growth produces high inflation. |
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Definition
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| If the price level rises 1% in a given month, then the inflation rate is 1%. |
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High inflation cannot be driven by fiscal policy alone. |
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T/F
Supply-side phenomena are a source of high inflation. |
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T/F
When inflation is accompanied by an unemployment rate that is below the natural rate of unemployment, the inflation is cost-push inflation. |
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Definition
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T/F
Cost-push inflation is unrelated to money growth. |
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the United States government, as well as the governments of may other coutries, has the right to issue currency to pay its bills. |
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from 1960-1980, debt relative to GDP increased in the United States. |
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An important element of the nonactivist viewpoint is that the effectiveness lag is long and variable. |
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Definition
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In the past, Monetarists advocated discretionary monetary policy. |
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Activists advocate the use of a constant-money-growth-rate rule. |
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Definition
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Monetarists now favor rules that adjust for changes in velocity. |
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Definition
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Both cost-push and demand-pull inflation can result from activist stabilization policy to promote high employment. |
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in all episodes of hyperinflation, huge government budget deficits are the ultimate reason for high money growth and inflation. |
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