1. Suppose an increase in world shipping costs broadly increases costs to firms and causes an...

 

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1. Suppose an increase in world shipping costs broadly increases costs to firms and causes an increase in inflation. A. Does this describe cost push (supply side) inflation or demand pull (demand side) inflation? B. In our model of short run inflation what variable does this change? C. For the rest of this question, assume inflation expectations have risen to match the current level of inflation. Illustrate this effect on the Philips Curve in the Philips Curve - Monetary Policy Rule graph. D. What does the monetary policy rule suggest that the central bank do in response? Illustrate the initial reaction of monetary policy on the Philips Curve - Monetary Policy Rule graph. How does this monetary policy response shift the Philips Curve? Why? Draw a new Philips Curve representing this shift on the previous graph. E. When we compared a dual mandate with a single mandate for price stability in class we showed that a dual mandate implies that monetary policy should be less aggressive (lower phi) to inflation from cost shocks. If monetary policy was less aggressive than the response in D, how would the adjustment differ from the adjustment in D? Would the less aggressive monetary policy rule be steeper or shallower? F. Suppose the central bank decided to respond by keeping real interest rates constant instead of pursuing disinflation (suppose that short run GDP stays at 0). If the cost shock is temporary, what happens to inflation once it dissipates? Why? 1. Suppose an increase in world shipping costs broadly increases costs to firms and causes an increase in inflation. A. Does this describe cost push (supply side) inflation or demand pull (demand side) inflation? B. In our model of short run inflation what variable does this change? C. For the rest of this question, assume inflation expectations have risen to match the current level of inflation. Illustrate this effect on the Philips Curve in the Philips Curve - Monetary Policy Rule graph. D. What does the monetary policy rule suggest that the central bank do in response? Illustrate the initial reaction of monetary policy on the Philips Curve - Monetary Policy Rule graph. How does this monetary policy response shift the Philips Curve? Why? Draw a new Philips Curve representing this shift on the previous graph. E. When we compared a dual mandate with a single mandate for price stability in class we showed that a dual mandate implies that monetary policy should be less aggressive (lower phi) to inflation from cost shocks. If monetary policy was less aggressive than the response in D, how would the adjustment differ from the adjustment in D? Would the less aggressive monetary policy rule be steeper or shallower? F. Suppose the central bank decided to respond by keeping real interest rates constant instead of pursuing disinflation (suppose that short run GDP stays at 0). If the cost shock is temporary, what happens to inflation once it dissipates? Why?

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A This describes costpush inflation because the increase in world shipping costs is causing an increase in the cost of production for firms This incre... View the full answer