Chapter 22 – Understanding Business Cycle Fluctuations
95. Discuss the short- and long-run output responses resulting from an increase in money
growth when the economy is producing a current level of output that equals potential output,
all other factors constant.
96. Why could it be effectively argued that the temporary increase in inflation from the
spending for the Vietnam War was made permanent by the Fed?
Chapter 22 – Understanding Business Cycle Fluctuations
97. In 2001 a combination of tax cuts and increased defense spending did not have the same
inflationary effect as the similar policy in the 1960s. Explain the difference.
98. Where would the economy be operating relative to the dynamic aggregate demand curve,
the short-run aggregate supply curve and the long-run aggregate supply curve, if the economy
is experiencing an expansionary gap?
Chapter 22 – Understanding Business Cycle Fluctuations
99. Use the long-run model presented in Chapter 22 to answer this question. If there is a
decrease in aggregate demand, and monetary policymakers counter the decrease in aggregate
demand, what will be the impact on output and inflation? Explain.
100. Why does it take so long for the declaration of the beginning and end of recessions in the
U.S. and why is there a lack of clarity as to what is and is not a recession?
Chapter 22 – Understanding Business Cycle Fluctuations
101. Why do negative supply shocks pose a particularly difficult dilemma for monetary
policymakers?
102. Describe a scenario where a negative supply shock (that raises the rate of inflation)
results in a permanently higher rate of inflation.
Chapter 22 – Understanding Business Cycle Fluctuations
103. Why can monetary policymakers neutralize demand shocks but not supply shocks?
104. Neutralizing demand shocks is easier in theory than in practice. Why?
Chapter 22 – Understanding Business Cycle Fluctuations
105. What is meant by saying that automatic fiscal policy is countercyclical?
106. Fiscal policy can act just like monetary policy to offset shifts in the dynamic aggregate
demand curve and stabilize inflation and output. Explain how the two policies could have the
Chapter 22 – Understanding Business Cycle Fluctuations
107. Why would most economists default first to monetary policy for stabilization before
using fiscal policy?
108. What is opportunistic disinflation and what provides the opportunity? Explain how the
process works.
Chapter 22 – Understanding Business Cycle Fluctuations
109. What explanations have been offered to account for the Great Moderation of the 1990s?
110. Use the long-run model from Chapter 22 to describe the adjustment process the economy
would go through from an increase in potential output.
111. Why do increases in potential output allow monetary policymakers to think
“opportunistically” about disinflation?
Chapter 22 – Understanding Business Cycle Fluctuations
112. Explain the view called real business cycle theory.
113. Explain why real business cycle theory renders the short-run aggregate supply curve
irrelevant.
Chapter 22 – Understanding Business Cycle Fluctuations
114. Explain how globalization impacts inflation in both the short run and the long run.
115. Does an increase in the rate of inflation always imply that aggregate demand is
increasing? Explain.
116. In recent years the discussions of the causes of recessions have focused on monetary
policy and higher oil prices as the likely causes. Discuss how we can get insight into the likely
cause by focusing on macroeconomic variables.
Chapter 22 – Understanding Business Cycle Fluctuations
22–44
117. When a negative supply shock occurs it is extremely important for monetary
policymakers to discern whether or not potential output has decreased. Why does that matter?
118. While monetary policymakers cannot shift the short-run aggregate supply curve
following inflation shocks, they can minimize the impact that the changes in inflation have on
output. Describe how they can do this through the monetary policy reaction curve.
Essay Questions
Chapter 22 – Understanding Business Cycle Fluctuations
119. In the article from the New York Times in Chapter 22, the Fed is described as having a
dilemma. What was the dilemma, and what would be the consequences if the Fed chose the
wrong course of action?
Chapter 22 – Understanding Business Cycle Fluctuations
120. More than once in our history government officials tried to slow rapidly rising inflation
by instituting wage and price controls, in essence, making it illegal to raise prices. In terms of
the model, which includes aggregate demand, short-run aggregate supply and long-run
aggregate supply, describe what the intended result of the officials would be and what the
likely result may be.