CHAPTER REVIEW
Preparing a Worksheet
1.
(S.O. 1) The steps in preparing a work sheet are:
a. Prepare a trial balance on the work sheet.
b. Enter the adjustments in the adjustments columns.
c. Enter adjusted balances in the adjusted trial balance columns.
CHAPTER REVIEW
Plant Assets
1.
(S.O. 1) Plant assets are resources that have a physical substance ( a definite size and shape),
are used in the operations of a business and are not intended for sale to customers. They are also
called property, plant, and
relatively small and, because of menu costs, a lower price may not
increase its profits, so that it does not reduce its price. Instead, it reduces
its output to meet the new, lower, demand at the pre-existing price. With
each firm behaving in this manner,
because of the cost of hiring and training workers and the firmspecificity of skills acquired through training and learning on the job, so
that the productivity of such a skilled worker will be 20 It also explains
the existence of dual markets, wage distr
aggregate supply of commodities, CGG assume that such a policy would
raise permanent income and increase aggregate demand to the same
extent, so that the output gap will not change. Nor will there be any
pressure on inflation. Therefore, monetary policy w
were stable and all disturbance terms in (43) were equal to zero,
substitution of the Taylor rule for the interest rate in the money market
equilibrium condition would yield a money supply function that is itself
a type of Taylor rule. For instance, subst
15.4.1 NK commodity market analysis The NK closed economy
(expectational) IS equation for equilibrium in the commodity market is:
yt = ct +it +gt where c is real consumption, i is real investment and g is
real government expenditures on commodities. In th
aggregate demand from AD0 to AD1 leads to the supply of output y1 at
the sticky price P0. Conversely, a decrease in the aggregate demand
from AD0 to AD2 leads to the supply of output y2, but again without an
accompanying change from the sticky price level
financial markets, so that the money supply becomes an endogenous
variable and is no longer relevant to the determination of aggregate
demand, output, employment, the price level or inflation. It can thus be
removed from the macroeconomic analysis for the
the central bank will achieve its target for the trend inflation rate, t+1
will equal this target trend rate. 544 Monetary policy and the
macroeconomy The third equation is the monetary policy one, specified
by: Rt = r t + t + (t t)+y ln(yt/yf t ) (37) wh
money supply made endogenous, as the critical determinant of aggregate
demand, is in the tradition of Wicksells model for the pure credit
economy (see Chapter 2), so that it has sometimes been called a neoWicksellian model. While the standard NK model, as
demand analysis Involuntary unemployment can have no meaning
within the confines of static equilibrium analysis. Conversely, the
essence of dynamic analysis is involuntariness: its domain consists only
of positions off the [notional] demand or supply curv
Hence, reductions in aggregate demand in the short run partly lead to
labor hoarding, with a consequent fall in average productivity, and partly
to an increase in unemployment, with some of the laid-off workers being
put on recall and voluntarily waiting
Sticky prices also reduce the real impact of demand increases in an
inflationary environment. In a high inflationary environment, since
prices are rising anyway, sticky price firms will find it profitable to
adjust their prices more rapidly than in a zero
information and action is no different in nature from that of the central
bank, which, even with all the data and information at its disposal in
modern economies, still finds the incoming information at any given
point in time to be incomplete, fuzzy and
rigidities can generate substantial nominal rigidity of the price level,
which, in turn, can cause substantial departures from the neutrality of
monetary policy (Blanchard, 2000, pp. 139091). Note that the above
conclusions pertain to monopolistic competi
theories. One of these was the efficiency wage hypothesis, which
asserted the short-run rigidity of real wages, in contrast to that of
nominal wages. Another neoKeynesian theory was the menu cost theory,
which provided a new basis for the short-run rigidi
better than forecasts of inflation farther into the future. 540 Monetary
policy and the macroeconomy Backward-looking Taylor rule: rT t = r0
+xt +(t1 T) , > 0 (26) Forward-looking Taylor rule: rT t = r0
+Etxt+1 +(Ett+1 T) , > 0 (27) In these rules, r0 is
decrease in demand. Therefore, in order for the Taylor rule to reflect the
asymmetric effects of aggregate demand changes on inflation and
output, it too would have to be asymmetric. 39 A simple modification of
the Taylor rule to allow interest rate smoot
workers and that these workers are willing to accept jobs at the existing
real wage. Hence, the increase in aggregate demand will be
accommodated through an increase in employment and output, without
necessarily a change in real wages. Conversely, a decre
as demand shocks. The NK model of CGG states this closed-economy
expectational IS relationship for equilibrium in the commodity market
as: xt = f (xt+1,rt,gt) where xt = yt yf , so that x represents the output
gap. Assuming rational expectations and the F
nominal interest rate on riskless assets, r is the real interest rate and rn is
its long-run equilibrium (full-employment) value; and is the inflation
rate. Future values of the variables are rationally expected ones. There is
a strong intertemporal eleme
increase in the firms price, the greater the increase in output24 and the
slower the return to long-run 23 This process has been likened to the
movement of a chain gang (whose members are tied together by a
chain). Usually, the larger the number of member
constraints specified by the IS equation and the price adjustment
equation imposed by the economy (CGG, 1999). Doing so for the
optimal or target real interest rate, and using Ett+1 to represent the
rationally expected future levels of inflation, yields t
positive slope, with this slope being less than if none of the firms
experienced sticky prices. The nature of this curve is shown in Figure
15.4b. It assumes that outside a certain range, defined by AD1 and AD2,
of the change in aggregate demand, it becom
constant coefficients, is not a proper representation of the Keynesian
implications. 2 Both the unanticipated and the anticipated values of the
money supply as also of the fiscal variables will affect output
equally, as against the modern classical assert
price adjustment analysis For the price adjustment process, the new
Keynesian school assumes monopolistic competition in commodity
markets and that each firm sets its product price so as to maximize its
profits subject to the cost and frequency of expecte
Japan. Moreover, estimates of the 552 Monetary policy and the
macroeconomy Taylor rule tend to show that its coefficients do shift
with changes in the leadership of the central bank. This is quite plausible
since these coefficients reflect central bank pr
backward-looking (forward-looking) rule can be augmented to include
additional backward (forward) output and inflation gaps. Because of lags
in the impact of monetary policy, a forward-looking Taylor rule is
preferable to the contemporaneous and backward-
increases aggregate demand at the existing level of prices (and nominal
wages), so that relative prices (and relative and absolute real wages) are
also at their initial levels. The increase in aggregate demand increases
the demand for each commodity. Furt