Lecture 15

Question 1

What is deflation spiral?

Answer 1

If inflation rate becomes negative, people delay consumption and investment anticipating lower price levels, AD falls further and further plunging the economy into deeper deflation

Question 2

Why is inflation targeted at 2%?

Answer 2

It is easier to solve inflation problem (raise interest rate) than solving deflation problems (harder to recover because you cannot lower interest rate below 0%)

Question 3

Taylor Rule

Answer 3

Provides risk assessment of whether the risk to GDP growth or risk to inflation is more severe and needed the response

Question 4

Core PCE

Answer 4

Core index makes it easier to see the underlying inflation trend by excluding food and energy (prices tend to swing up and down more dramatically than other prices)

Question 5

Fiscal Multiplier

Answer 5

Change in Economy GDP/Change in Government Expenditure

Question 6

How powerful are fiscal multipliers during recessions?

Answer 6

Stronger multiplier effect during recessions. When interest rate is near 0, small crowding out effect, larger fiscal multiplier. Could be used to get out of recession. G/GDP should rise in times of recession.