Assume That People Form Expectations Rationally and That the Sticky-Price

question 74

Essay

Assume that people form expectations rationally and that the sticky-price model describes the aggregate supply curve in the economy. For each of the following scenarios explain whether or not monetary policy can have real effects on the economy.
a.The central bank determines monetary policy using the same information available to all firms and at the same time firms are setting prices, so that both firms and policymakers have all of the same information.
b.The central bank determines monetary policy after firms have set prices using information not available at the time prices were set.

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Definitions:

Zero Coupon Bond

A bond that does not pay periodic interest but is issued at a discount from its face value and matures at that face value, effectively creating a fixed rate of return.

Equity

The value of an ownership interest in a company, represented by the share of assets after all liabilities have been deducted.

Treasury Bills

Short-term government securities issued at a discount from the face value and maturing at par, used as a means for governments to borrow money.