Problem set for seminar 7
1. Let’s talk about your assessment – go over the assessment brief. Q&A session. Note, there are assessment Q&A threads on the Discussion Board.
2. Margaret Thatcher started an aggressive disinflationary policy when she came to office as the UK’s prime minister in 1979. In October 1980, she delivered her famous “the lady’s not for turning” speech. What was the aim of this speech and how was it influenced by monetarist views on the importance of credibility and managing inflation expectations?
3. Assess the following statement: “during the financial crisis central banks significantly expanded their balance sheets through quantitative easing and this did not cause inflation expectations to become less firmly anchored to the inflation target, thus we can say that QE does not pose a danger to macroeconomic stability.”.
Extra questions for independent study (start discussing in class if there is time)
4. Section 13.2.2 sets out two conditions (i.e., (1) the central bank must be able to control the chosen monetary aggregate and (2) the relationship between inflation and the targeted monetary aggregate must be reliable) that must hold if monetary targeting is going to succeed in controlling inflation. Briefly explain these two conditions and why they were violated during the Thatcher experiment with monetary targeting in the UK.
5. Use a PC − MR diagram to show that the cumulative unemployment caused by disinflation is independent of the degree of inflation aversion (β) of the central bank. How does this finding change if:
(a) The Phillips curves are convex
(b) The Phillips curve are steeper (i.e. ↑ α)?
