4. Consider the money market model with the interest rate and the AD-AS model. In cases below, choose correct change in the interst rate and correct shift of the AD curve. 4.a. Central bank increased the money supply. Change in interest rate: Decrease or Increase Shift of AD: Leftward or Rightward 4.b. Central bank decreased the money supply. Change in interest rate: Decrease or Increase Shift of AD: Leftward or Rightward 5. Suppose that the economy fell into a recession. Which is the usual policy the central bank uses to stabilize the economy: Contractionary monetary policy or Expansionary monetary policy?

4. Consider the money market model with the interest rate and the AD-AS model. In cases below, choose correct change in the interst rate and correct shift of the AD curve. 4.a. Central bank increased the money supply. Change in interest rate: Decrease or Increase Shift of AD: Leftward or Rightward 4.b. Central bank decreased the money supply. Change in interest rate: Decrease or Increase Shift of AD: Leftward or Rightward 5. Suppose that the economy fell into a recession. Which is the usual policy the central bank uses to stabilize the economy: Contractionary monetary policy or Expansionary monetary policy?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter32: Macroeconomic Policy Around The World

Section: Chapter Questions

Problem 9SCQ: Show, using the AD/AS model, how governments can use monetary policy to decrease the price level.

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Similar questions

1. Within the IS-LM and AD-AS model, show how income, interest rate and price level are affected by each of the following both in the fixed and flexible price cases: a. An autonomous increase in investment spending. b. A decline in taxes. c. A decline in the money supply. In each case, explain why the changes in income and the interest rate occur. Use IS-LM and AS-AD diagrams.
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Suppose that in Macroland the consumption and the investment have a negative relationship withthe real interest rate and positive relationship with Y. The Central Bank of the country targets acertain nominal interest rate and lets the money supply adjust in order to reach that interest rate.a. Draw a graph of the IS-LM model in this situation.b. Suppose that the Central Bank announces an increase of the interest rate in the future.Represent graphically the initial position of IS-LM curves. Then, show the IS-LM curves of thefuture, after the announced increase in the interest rate is implemented. (Assume that the ISis constant.).c. Suppose that agents today take into consideration the resulting income of the future whendeciding the amount of consumption and investment. Show what happens to the IS-LMcurves today after the announcement of the CB (tip: the CB is NOT increasing the nominalinterest rate today).d. The government decides to step in and avoid any deviation of Y from the initial…
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2. The graph below shows the AD-AS model in short-run equilibrium at price level Po and level of real GDP at Yo. Label the following: AD, SRAS, LRAS, Po and Yo. P Y A. Is this SR equilibrium a recessionary gap or an inflationary gap? Why is the undesirable? B. Assume Congress and the President decide to act. How would you suggest they alter each of the following (1,↓↓, or no change)? - Taxes - Transfer Payments -Government Spending C. Show the effects of these changes in the space above. Assume this intervention brings the economy back to potential GDP. D. As the economy moves from Yo to Yp, what happens to the following (1,↓, or no change)? - Real GDP - the unemployment rate - The price level - the rate of inflation