Review Sheet - Finals

Question 1

Explain the controversy regarding the Phillips curve—what did people think and what occurred?

Answer 1

Whether or not this constituted a menu of options
1964 they did a Keysenian Experiment. Government spending rises, taxes dropped and aggregate demand rises.

The Phillips Curve facts:
Negative relationship.
Stable short-run Phillips Curve -> anchored by inflationary expectations -> changes in those causes curve to shift.
People expect it to move up and down due to expectations -> supply shocks in oil is also that shifts it up.

Question 2

The Gold Standard:

Answer 2

2. “the Gold Standard”: what are the pros and cons?
   The show visited the charming curmudgeon and respected finance writer James Grant. He says we should go back on the gold standard. His basic argument: Under the gold standard, money holds its value. Central banks can’t create (or destroy) money at a whim.
   In his words: “So the gold standard, the value was fixed and we adjusted our affairs to this North Star of value. Today, the North Star is like a comet. Ben Bernanke testifies one day, he thinks he wants to impart a little zest into our shopping by injecting more green, paper dollars into the world. He thinks that more of them will be more better. Why? Because it will cause prices to go up just enough. Not too much, but just enough. Do you believe that? It’s risible. Laughable.”
   Explain why most economist think going back on the gold standard would be a terrible idea:
   It’s much easier to print money.
   Even though gold retains it value good, you can’t print gold in the same way as cash which is needed sometimes.
   Sometimes you want the fiat money to lose value, you want inflation, because it can lead to people investing and that helps the economy going.
   If America would keep importing more than exporting, you would run out of gold coins.
   Less money, wages would have to drop. For example people working in the steel industry, it their wages drops -> leads to the steel also dropping.
   People all around the world will therefore buy more from the U.S.