Discuss an inflation targeting central bank in open economy

Reference no: EM133243133

Assignment:

1) Keynesians disagreed with the classical economists regarding money neutrality mainly because the Classics assumed that

A) Wage-price rigidities are observed during recessions but are not prevalent during economic expansions

B) Once countries go through a period of fast-rising money supply, rational agents expect money neutrality & increase labor supply

C) Output is determined by the availability of factors of production & their marginal product, factors unaffected by the money supply

D) Two of the above alternatives are correct

D) All the above alternatives are correct

2) Consider an inflation targeting Central Bank in an open economy uses a simple DSGE model similar to the one discussed in class. Initially, expected inflation equals target and expected output gaps are zero. Then a severe drought damages agricultural production and the government quickly introduces an income-support program in which every agricultural producer receives a check equivalent to their earnings in the previous year. The DSGE model would probably show

A) a decrease in expected inflation and an increase in the output gap

B) a decrease in expected inflation and output gap

C) an increase in expected inflation and a decrease in the output gap

D) an increase in expected inflation and output gap

3) Consider an inflation targeting Central Bank in an open economy uses a simple DSGE model similar to the one discussed in class. Initially, expected inflation equals target and expected output gaps are zero. Then a severe drought damages agricultural production and the government quickly introduces an income-support program in which every agricultural producer receives a check equivalent to their earnings in the previous year. Taxes cannot be increased. To maintain inflation on target, the Central Bank would

A) Announce a decrease in the policy interest rate; buy bonds through open market operations

B) Announce a decrease in the policy interest rate; sell bonds through open market operations

C) Announce an increase in the policy interest rate; buy bonds through open market operations

D) Announce an increase in the policy interest rate; sell bonds through open market operations

Reference no: EM133243133

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