//*******************************************
//****** Section econ24/macro-12 specific js
//===== figures ro resize
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var imagesMedium = "";
var imagesLarge = "";
var imagesXlarge = "krugmanwellsmodulesecon3-sect24-figure-1,krugmanwellsmodulesecon3-sect24-figure-22,krugmanwellsmodulesecon3-sect24-figure-34,";
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xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m76-cyu-1'] = "The inflation rate is more likely to quickly reflect changes in the money supply when the economy has had an extended period of high inflation. That’s because an extended period of high inflation sensitizes workers and firms to raise nominal wages and prices of intermediate goods when the aggregate price level rises. As a result, there will be little or no increase in real output in the short run after an increase in the money supply, and the increase in the money supply will simply be reflected in a proportional increase in prices. In an economy where people are not sensitized to high inflation because of low inflation in the past, an increase in the money supply will lead to an increase in real output in the short run. This illustrates the fact that the classical model of the price level best applies to economies with persistently high inflation, not those with little or no history of high inflation even though they may currently have high inflation.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m76-cyu-2'] = "Yes, there can still be an inflation tax because the tax is levied on people who hold money. As long as people hold money, regardless of whether prices are indexed or not, the government is able to use seignorage to capture real resources from the public.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m76-ct-1'] = "Your diagram should look like this.
";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m77-cyu-1'] = "When real GDP equals potential output, cyclical unemployment is zero and the unemployment rate is equal to the natural rate. This is the case at point E1 in the figure assuming a natural rate of 6%. Any unemployment in excess of this 6% rate represents cyclical unemployment. An increase in aggregate demand leads to a fall in the unemployment rate below the natural rate (negative cyclical unemployment) and an increase in the inflation rate. This is given by the movement from E1 to E2 in the figure and traces a movement upward along the short-run Phillips curve. A reduction in aggregate demand leads to a rise in the unemployment rate above the natural rate (positive cyclical unemployment) and a fall in the inflation rate. This would be represented by a movement down along the short-run Phillips curve from point E1. So for a given expected inflation rate, the short-run Phillips curve illustrates the relationship between cyclical unemployment and the actual inflation rate.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m77-cyu-2'] = "There is no long-run trade-off between inflation and unemployment because after expectations of inflation change, wages will adjust to the change, returning employment and the unemployment rate to their equilibrium (natural) levels. This implies that once expectations of inflation fully adjust to any change in actual inflation, the unemployment rate will return to the natural rate of unemployment, or NAIRU. This also implies that the long-run Phillips curve is vertical.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m77-cyu-3'] = "Disinflation is costly because to reduce the inflation rate, aggregate output in the short run must typically fall below potential output. This, in turn, results in an increase in the unemployment rate above the natural rate. In general, we would observe a reduction in real GDP. The costs of disinflation can be reduced by not allowing inflation to increase in the first place. The costs of any disinflation will also be lower if the central bank is credible and it announces in advance its policy to reduce inflation. In this situation, the adjustment to the disinflationary policy will be more rapid, resulting in a smaller loss of aggregate output.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m77-cyu-4'] = "If the nominal interest rate is negative, an individual is better off simply holding cash, which has a 0% nominal rate of return. If the options facing an individual are to lend and receive a negative nominal interest rate or to hold cash and receive a 0% nominal rate of return, the individual will hold cash. Such a scenario creates the possibility of a liquidity trap, in which monetary policy is ineffective because the nominal interest rate cannot fall below zero. Once the nominal interest rate falls to zero, further increases in the money supply will lead firms and individuals to simply hold the additional cash.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m77-ct-1'] = "4%";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m77-ct-2'] = "2%, because 4% − 2% = 2%";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m77-ct-3'] = "0%, because although 4% − 6% = −2%, nominal interest rates can’t go below zero";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m77-ct-4'] = "Lenders would effectively have to pay people to borrow money, in that what the lenders received back would be less than what they lent out. No lending would take place. It is better to hold cash than to pay people to borrow money.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m77-ct-5'] = "Conventional monetary policy (decreasing interest rates) can’t happen if the nominal interest rate is already zero. This is called the zero bound or a liquidity trap.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m78-cyu-1a'] = "This is not an example of maturity transformation because no short-term liabilities are being turned into long-term assets. So it is not subject to a bank run.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m78-cyu-1b'] = "This is an example of maturity transformation: Dana incurs a short-term liability, credit card debt, to fund the acquisition of a long-term asset, better job skills. It can result in a bank-run-like phenomenon if her credit card lender becomes fearful of her ability to repay and stops lending to her. If this happens, she will not be able to finish her course and, as a result, will not be able to get the better job that would allow her to pay off her credit card loans.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m78-cyu-1c'] = "This is not an example of maturity transformation because there are no short-term liabilities. The partnership itself has no obligation to repay an individual partner’s investment and so has no liabilities, short term or long term.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m78-cyu-1d'] = "This is an example of maturity transformation: the checking accounts are short-term liabilities of the student union savings bank, and the student loans are long-term assets.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m78-cyu-2'] = "According to standard macroeconomics, a government should adopt expansionary policies to increase aggregate demand to address an economic slump. France, however, did just the opposite, responding to a weaker economy with a contractionary fiscal policy that would make the economy even weaker. This shows that the French government had adopted the austerity view, believing that it was more important to try to assure markets of its solvency than to support the economy.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m78-cyu-3'] = "Because shadow banks like Lehman relied on short-term borrowing to fund their operations, fears about their soundness could quickly lead lenders to immediately cut off their credit and force them into failure. And without membership in the lender-of-last-resort system, shadow banks like Lehman could not borrow from the Federal Reserve to make up for the short-term loans it had lost.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m78-cyu-4'] = "If there had been only a formal depository banking sector, several factors would have mitigated the potential and scope of a banking crisis. First, there would have been no repo financing; the only short-term liabilities would have been customers’ deposits, and these would have been largely covered by deposit insurance. Second, capital requirements would have reduced banks’ willingness to take on excessive risk, such as holding onto subprime mortgages. Also, direct oversight by the Federal Reserve would have prevented so much concentration of risk within the banking sector. Finally, depository banks are within the lender-of-last-resort system; as a result, depository banks had another layer of protection against the fear of depositors and other creditors that they couldn’t meet their obligations. All of these factors would have reduced the potential and scope of a banking crisis.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m78-cyu-5'] = "Because the shadow banking sector had become such a critical part of the U.S. economy, the crisis of 2008 made it clear that in the event of another crisis, the government would need to guarantee a wide range of financial institution debts, including those of shadow banks (in addition to those of depository banks). The result was an incentive problem: shadow banks would be able to take more risk, knowing that the government would bail them out in the event of a meltdown. To counteract this, the Dodd-Frank Act gave the government the power to regulate “systemically important” shadow banks (those likely to wreak havoc on the economy should they fail) in order to reduce their risk taking. It also gave the government the power to seize control of failing shadow banks in a way that was fair to taxpayers and and that did not enrich the bankers involved.";
xBookUtils.showAnswers['krugmanwellsmodulesecon3-s24m78-ct-1'] = "A banking crisis occurs when a large part of the banking sector is in danger of failing. A banking crisis normally leads to a deep recession because of a credit crunch, debt overhang, and a loss of monetary policy effectiveness. A credit crunch occurs when borrowers either cannot get credit or must pay very high interest rates. The reduction in borrowing will reduce spending and output. Debt overhang occurs when a vicious cycle of deleveraging pushes down asset prices. Consumers and businesses are left with high debt but diminished assets. Monetary policy becomes ineffective when financial institutions are unwilling to lend and/or businesses and consumers are unwilling to borrow. The overall disruption of financial markets typically leads to a deep recession.";
//mod 40 EIA
if ($('div[data-figure-id="krugmanwellsmodulesecon3-sect24-figure-11"]').length) {
var $this = $('div[data-figure-id="krugmanwellsmodulesmacro3-sect12-figure-11"]')
var this_html = $this.html();
//alert (this_html);
$this.attr("data-layout-align","right");
$this.attr("data-width","400");
}
// mod 41 EIA unnumbered fig
if ($('div[data-figure-id="krugmanwellsmodulesecon3-sect24-figure-20"]').length) {
var $this = $('div[data-figure-id="krugmanwellsmodulessecon3-sect24-figure-20"]')
$this.attr("data-width","400");
$this.css("margin","-10px -100px 0px 0px");
$this.css("clear","both");
}
// figures 42-3 & 42-4
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