Assume a country's economy is currently in a recession. (a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. (i) Current real output, labeled Y₁, and current price level, labeled PL, (ii) Full employment output, labeled YFE (b) Assume the economy operates under a limited reserves system. (i) Identify one action the central bank can take to help the economy recover from the recession. Explain how the action will affect the economy. (ii) Draw a correctly labeled graph of the money market, and show the impact of the central bank's action identified in part (b)(i) on the nominal interest rate. (c) Assume the economy operates under an ample reserves system instead of a limited reserves system. (i) Identify one policy the central bank can take to help the economy recover from the recession. Explain how the action will affect the economy. (ii) Draw a correctly labeled graph of the reserves market, and show the impact of the central bank's action identified in part (c)(i) on the policy rate. (d) On your graph for part (a), show the effect of the central bank's actions identified in part (b) and (c) on real output and the price level. (e) Assume there is an increase in business confidence as a result of the central bank's action. (i) Draw a correctly labeled graph of the loanable funds market, and show the effect of the change identified in part (e) on the real interest rate.
Assume a country's economy is currently in a recession. (a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. (i) Current real output, labeled Y₁, and current price level, labeled PL, (ii) Full employment output, labeled YFE (b) Assume the economy operates under a limited reserves system. (i) Identify one action the central bank can take to help the economy recover from the recession. Explain how the action will affect the economy. (ii) Draw a correctly labeled graph of the money market, and show the impact of the central bank's action identified in part (b)(i) on the nominal interest rate. (c) Assume the economy operates under an ample reserves system instead of a limited reserves system. (i) Identify one policy the central bank can take to help the economy recover from the recession. Explain how the action will affect the economy. (ii) Draw a correctly labeled graph of the reserves market, and show the impact of the central bank's action identified in part (c)(i) on the policy rate. (d) On your graph for part (a), show the effect of the central bank's actions identified in part (b) and (c) on real output and the price level. (e) Assume there is an increase in business confidence as a result of the central bank's action. (i) Draw a correctly labeled graph of the loanable funds market, and show the effect of the change identified in part (e) on the real interest rate.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Can someone please help me solve a-c I'm very confused
Transcribed Image Text:Assume a country's economy is currently in a recession.
(a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate
supply, and aggregate demand curves, and show each of the following.
(i) Current real output, labeled Y₁, and current price level, labeled PL,
(ii) Full employment output, labeled YFE
(b) Assume the economy operates under a limited reserves system.
(i) Identify one action the central bank can take to help the economy recover from the
recession. Explain how the action will affect the economy.
(ii) Draw a correctly labeled graph of the money market, and show the impact of the
central bank's action identified in part (b)(i) on the nominal interest rate.
(c) Assume the economy operates under an ample reserves system instead of a limited
reserves system.
(i) Identify one policy the central bank can take to help the economy recover from the
recession. Explain how the action will affect the economy.
(ii) Draw a correctly labeled graph of the reserves market, and show the impact of the
central bank's action identified in part (c)(i) on the policy rate.
(d) On your graph for part (a), show the effect of the central bank's actions identified in part
(b) and (c) on real output and the price level.
(e) Assume there is an increase in business confidence as a result of the central bank's
action.
(i) Draw a correctly labeled graph of the loanable funds market, and show the effect of
the change identified in part (e) on the real interest rate.
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