Can central bankers set short-term interest rate targets and still control inflation in the long run or are these goals mutually impossible? Explain.
What will be an ideal response?
They can attain both goals. The monetary policy reaction curve shows that the central bankers can influence aggregate demand and, ultimately inflation by adjusting the real interest rate. In the long run, inflation is determined by money growth. The central bankers can alter their balance sheets and the monetary base in the short run to change the short-term real interest rate. Money growth on the other hand depends on the willingness of central bankers to expand their balance sheets for the long run.
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Double markup problems arise when
a. upstream firms have no market power b. downstream firms have no market power c. upstream and downstream products are complementary in demand d. upstream and downstream firm's pricing decisions tend to increase the demand for the other product
Refer to the table below. Suppose the perfectly competitive market for dairy products had a 40 percent chance of a high price of $3.00 and a 60 percent chance of a low price of $2.00. However, both Happy Cows and Free Cows have revised their probabilities and now believe that the probability of a high price of $3.00 is 80 percent and the probability of a low price of $2.00 is 20 percent. If the
managers of Happy Cows want to maximize expected profit based on the new probabilities by how much will they change the quantity produced?
Happy Cows and Free Cows are two separate perfectly competitive dairy farms. The table above shows the respective firms' marginal cost at various production levels.
A) Happy Cows will decrease their production by 20 units.
B) Happy Cows will decrease their production by 40 units.
C) Happy Cows will increase their production by 40 units.
D) Happy Cows will increase their production by 20 units.