The Short Run

Question 1

What are the costs of output fluctuations?

Answer 1

Unemployment, bankruptcies, reduced consumption opportunities

Question 2

What is monetary policy?

Answer 2

Policy undertaken by the Fed involving I/R policy, inflation targeting, bank balance sheet regulation & open market regulations

Question 3

What is fiscal policy?

Answer 3

Policy undertaken by the Treasury involving tax policy, debt/borrowing policy and government spending

Question 4

How does a boom result in procyclical inflation?

Answer 4

↑Ỹt (Boom) → ↑C(↑Demand) → ↑Production (↑Costs to firms, w,K,L, demand for K → ↑r) → ↑Prices → ↑πt

Question 5

How does a recession result in procyclical disinflation?

Answer 5

Firms see little demand and must reduce costs both resulting in lower prices (or smaller price increases relative to inflation) leading to disinflation

Question 6

What is Okun’s Law?

Answer 6

u - u̅ = -(1/2) x Ỹt

Question 7

Why is Okun’s Law relationship smaller than might be expected?

Answer 7

Labour hoarding - Firms prefer to keep workers rather than lay them off when output decreases (inefficient to hire/fire, firms don’t want to lose knowledgeable/experienced workers). Participation rate increases - When employment increases, not all new jobs are filled by the unemployed