AD-AS vs the classical model and monetary policy. (a) How do the effects of a reduction of the money supply differ in the AD-AS and classical models? (b) How could we determine which of these two models best describes the actual economy? What should we be looking for in the data? (c) Why might the test you proposed in part b not be conclusive?

AD-AS vs the classical model and monetary policy. (a) How do the effects of a reduction of the money supply differ in the AD-AS and classical models? (b) How could we determine which of these two models best describes the actual economy? What should we be looking for in the data? (c) Why might the test you proposed in part b not be conclusive?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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In the monetarist version of the AD-AS framework, a decrease in velocity of money produces a ________________ shift of the _________ curve. Group of answer choices rightward; Ms (Money Supply) leftward; AD (Aggregate Demand) rightward; AS (Aggregate Supply) rightward; AD (Aggregate Demand)
(a) Using a basic Keynesian income determination model, describe the effects of the following changes, assuming that money demand is infinitely elastic: (i) an increase in government expenditure (ii) an increase in the marginal propensity to save (iii) a decrease in export demand (iv) an increase in the marginal propensity to import (v) a cut in the official rate of interest by the Monetary Policy Committee of the Bank of England Illustrate your answers with diagrams.
(a) Suppose that, in a liquidity trap, bank reserves are less liquid than government debt. If the central bank conducts an open market sale of government debt, what will be the effect on the price level? Use a diagram, explain your results. (b) Suppose that there is a decrease in the price of housing, which the central bank judges is a temporary asset price decrease. In the New Keynesian model, determine the central bank's optimal response to this asset price increase, using diagrams. (c) Suppose initially that inflation is at the central bank's target and the output gap is zero. Then, government spending goes up. Determine, with the aid of diagrams, how the degree of price stickiness affects the central bank's optimal response and explain your results.
b) use the "Lucas Island Model" to provide an explanation as to why money is leading and pro-cyclical according to the New Classical Economists. Be sure to include a completely labeled AS/AD diagram and an explanation of what we mean exactly by a Lucas Aggregate supply curve (along with the intuition underlying it). Finish your essay by discussing whether or not money is neutral in this New Classical model and why. ANSWER I WROTE The Lucas Island Model retains the assumption of rapid market clearing despite being based on incomplete information. The Lucas Island Model makes the same assumption as the traditional model that the money supply will rise before prices start to rise. Take a person, let's say a tailor. After observing the fabric market for some time, the tailor detects a rise in the cost of cloth. He believes that the relative price of cloth has increased because he is unaware of what has occurred to the prices of all other commodities, which is what we refer to as price…
Respond to the question with a concise and accurate answer, along with a clear explanation and step-by-step solution, or risk receiving a downvote.
How would the AD/AS model be different if it assumed rational expectations rather than adaptive expectations? Define and give an example of each.
How do Classical economists and Keynesian economists differ in their perceptions of how well markets and prices function? List and briefly explain the nature and functions of three market arenas. Which are the four components of the macroeconomy? Explain the interaction between these components through a circular flow diagram. Draw a graph of a business cycle. Label and explain each phase of the business cycle. Define the following concepts: Sticky Prices Expansion and contraction Inflation, Deflation and Hyperinflation Fiscal Policy and Monetary Policy
The purpose is to know if you can define each concept through a clear and precise explanation. Imagine that you are going to explain each term to someone who does not know anything about macroeconomics; With this in mind, the explanation should be as clear and simple as possible (not brief). Write a minimum of three sentences per term.1. deficit2. real interest rate3. expected investment
Instructions: For parts a-c, in order to receive full credit, you must make a selection for each option. For correct answer(s), click the box once to place a check mark. For incorrect answer(s), click the option twice to empty the box. a. What are the classical strategy options for macro policy? ? Lower interest rates to encourage spending and investment ? Reduction in trade barriers to make imported inputs less expensive ? ? ? b. What are the Keynesian strategy options for macro policy? ? Deregulation to make it easier and cheaper to supply more output ? Increase aggregate demand Increase in government spending ? Reduction in trade barriers to make imported inputs less expensive ? Increase in government spending ? Tax cuts so consumers can spend more ? c. What are the supply-side strategy options for macro policy? Increase aggregate supply Lower interest rates to encourage spending and investment Laissez faire Increase in government spending Increase aggregate supply Increase…
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Money Surprise Model (25%) Suppose in the Friedman-Lucas money surprise model, there is a negative TFP shock. Neither private sector agents nor the central bank can observe this shock directly. The central bank is committed to interest rate targeting. a- Using labour market diagram, draw the impact of this shock on the labour demand holding the interest rate constant. Provide an explanation. b- Argue that what happened in part (a) will affect the goods market. c- What action the central bank will take? How will this intervention affect the labour supply and goods market? You do not need to draw any diagrams d- Draw diagrams (labour market, goods market, and money market) to illustrate the final stage of the economy after the shock.
Use AD and AS curves to explain the effects on the equilibrium price level and equilibrium level of output in the short run.(a) An expansionary fiscal policy with the economy operating near full capacity. (b) A contractionary monetary policy during a period of high unemployment and excess industrial capacity. (c) A strong hurricane destroys energy plants which cause energy prices to increase, assuming that the Fed attempts to keep interest rates constant by accommodating inflation. (d) The federal government pursues a contractionary fiscal policy while the Fed acts to keep output from falling.