CHAPTER 21
Quick Check
1. a. False. Monetary policy has been shown to be effective in stimulating growth.
b. True
c. True
i. Uncertain. It may be wise for a government to commit not to negotiate with hostage
j. True
k. False. Tax cuts come first which leads to higher deficits and pressure to reduce spending.
2. a. Inflation will increase in the fourth year.
b. The President should aim for high unemployment early in the administration, to reduce
c. The policies are not likely to achieve the increase in output desired in the fourth year.
3. Answers will vary, but there is some discussion of this issue in the text.
4. New Zealand wants to eliminate fears that the central bank might try to reduce unemployment
Dig Deeper
5. a. e
t=0.5(D + R)
b. The unemployment rate will be less than the natural rate. Inflation will be higher than
c. The unemployment rate will be greater than the natural rate. Inflation will be lower than
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d. The results fit the evidence in Table 21-4 if one looks at the first two years of each
e. The unemployment rate will equal the natural rate, because π = πe. There will be high
6. The payoffs should be symmetrical, as written below. The table presented in the text leads to the
Welfare Cuts
Yes No
Defense
Cuts
Yes (R=1, D=1) (R=-2, D=3)
No (R=3, D=-2) (R=-1, D=-1)
a. If the Republicans cut military spending, the Democrats get 1 if they cut welfare, but 3 if
b. If the Republicans do not cut military spending, the Democrats get –2 if they cut welfare,
c. Given the answers above, the Republicans will not cut military spending, and the
Explore Further
7. Answers will vary.
8. a. Although this is clearly a matter of opinion, the objectives of monetary policy as stated in
b. Although this is clearly a matter of opinion, the requirement that the Fed Chair appear
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