Figure: Monetary Policy Inflation rate, 10% 7% 5% 4% Z ... W X 1% 2% 3% 5% Short-run aggregate supply AD₁ AD₂ ADO AD Real GDP growth rate 15. (Figure: Monetary Policy) Refer to the figure. Assume that the economy is initially at point Y in the graph. In the best case scenario, the Fed will: A) increase money supply to take the economy to point X. B) decrease money supply to take the economy to point W. C) increase money supply to take the economy to point W. D) decrease money supply to take the economy to point X. 16. Suppose the Fed reacts to an economic shock and quickly restores the economy to its long-run potential growth rate. It is most likely that this shock was: A) an aggregate demand shock. B) a real shock. C) a productivity shock. D) a supply shock.

Figure: Monetary Policy Inflation rate, 10% 7% 5% 4% Z ... W X 1% 2% 3% 5% Short-run aggregate supply AD₁ AD₂ ADO AD Real GDP growth rate 15. (Figure: Monetary Policy) Refer to the figure. Assume that the economy is initially at point Y in the graph. In the best case scenario, the Fed will: A) increase money supply to take the economy to point X. B) decrease money supply to take the economy to point W. C) increase money supply to take the economy to point W. D) decrease money supply to take the economy to point X. 16. Suppose the Fed reacts to an economic shock and quickly restores the economy to its long-run potential growth rate. It is most likely that this shock was: A) an aggregate demand shock. B) a real shock. C) a productivity shock. D) a supply shock.

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter10: Dynamic Change, Economic Fluctuations, And The Ad-as Model

Section: Chapter Questions

Problem 1CQ

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8a. Assume that an economy is at equilibrium at its potential GDP at $10 trillion and aprice level of 100. What would be the short-run impact of a significant fall in consumer confidence about the future? Provide an AD/AS model to support your answer. b. What policy would you recommend to the chairperson of the Federal Reserve? Be specific. Show the effect of this policy on your graph part a. c. What are the major goals of the Fed's monetary policy?
You have been hired as a Marco Economist by the President of the United States to help evaluate the recentannouncement by Federal Reserve chairman Ben Bernanke that the FED will be increasing interest rates again.Ben Bernanke has justified the move on the grounds that the economy continues to be strong. Answer thefollowing questions. Provide a graphical explanation for your answers whenever possible. 1. What is the fed trying to do?A. slow down the economyB. stimulate the economyC. remains unchanged 2. How is the fed doing it?A. buying bondsB. selling bondsC. remains unchanged 3. What happens to bond prices?A. increaseB. decreaseC. remains unchanged 4. What happens to the interest rate?A. increaseB. decreaseC. remains unchanged
1. Which of the following is concerned with changing the aggregate demand of thenation?A) External balanceB) Internal balanceC) Expenditure-changing policiesD) Expenditure-switching policiesAnswer: 2. Which of the following is an example of an expansionary monetary policy?A) Increase in TaxesB) Increase in the nation's money supplyC)Increased government expendituresD) Reduction in taxesAnswer:
3)Show and explain the effects of an increase in aggregate demand in the long-run and short-run by using AD–AScurves.2)Show and explain by using a graph, what will happen to the price level and real GDP if the quantity of moneyincreases and the increase is not anticipated; that is, the price level is not expected to change.1)By using aggregate demand (AD) and aggregate supply (AS) curves, show and explain the effects of ananticipated increase in money supply on macroeconomic equilibrium according to Rational ExpectationsHypothesis.
Price level (GDP deflator, 2009 = 100) I 130 120 110 100 8 0 16 LAS SAS ADO AD2 AD₁ 17 18 19 20 21 Real GDP (trillions of 2009 dollars) O increase government expenditures. In the above figure, the economy experiences an increase in aggregate demand so that the aggregate demand curve shifts from ADO to AD2. If the Fed wants to offset this change, it would O purchase government securities on the open market. sell government securities on the open market. raise taxes.
Throughout much of the current year 2020, Canada has been experiencing declining energy prices. Assume that the Canadian economy was in long-run equilibrium before these declines began. 1.Use the aggregate demand–aggregate supply model to illustrategraphically the short-run and long-run impact of this decline on output and prices. 2. If the Bank of Canada attempted to offset this deviation from the naturalrate in the short run, should the money supply be increased or decreased?
2. The graph below shows the AD-AS model in short-run equilibrium at a price level, Po, and a level of real GDP, Yo. Label the following: both axes, AD, SRAS, LRAS, Po, Yo, and Yp. A. Is this SR equilibrium a recessionary gap or an inflationary gap? * C. Explain carefully how the changes in part B eventually alter AD. Explain each step. B. Assume the Fed decides to act. How would you suggest they use or alter each of the following? - Open Mkt Operations - Required Reserve Ratio - Discount/Federal Funds Rates D. Show the effects of these changes in the space above. Assume this intervention brings the economy back to potential GDP. E. As the economy moves from Yo to Yê, what happens to the following measures of the aggregate economy? - the unemployment rate - the rate of inflation - Real GDP - The price level
Refer to the diagram to the right. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD- AS model, this would be depicted as a movement from OA. C to B. OB. C to D. OC. B to C. OD. A to B. OE. A to E. Price leve A LRAS B D E C Real GDP AD ₁ SRAS AD 3 AD 2
. Suppose that there is an increase in the price of housing, which the central bank judges is atemporary asset price bubble. In the New Keynesian model, determine the central bank’s optimalresponse to this asset price increase, using diagrams. Discuss your results.
Exhibit: Shift in Aggregate Demand LRAS SRAS AD CAD AD In this graph, initially the económy is at point E, with price Po and output Y aggregate demand is given by curve ADo, and SRAS and LRAS represent, respectively. short-run and long-run aggregate supply. Now suppose the Fed decides to reduce the money supply. The economy moves first 4o point in the short-run and then, in the long-run, to point O B: C OCB A:D O D. A
In the figure at right, assume the economy starts out in equilibrium at point d. If the Fed increases the money supply so that the new aggregate demand curve is AD3, then the new short-run equilibrium will be at point A. i. O B. c. C. b. D. a. Price Level 130 120 100 e b LRAS 9 с SRAS₁ SRAS₂ AD₁ Real GDP per Year ($ trillions) SRAS3 AD3 AD₂
Suppose you are chair of the Federal Reserve in 1995. You believe that potential output follows the dotted line after 1993, but in actuality, it follows the line denoted "True potential output." The current state of the economy is given by the curve "Actual output." Given the information in the figure, you _________, because you believe the economy is in a ________, but your advice instead OUTPUT O 1993 True potential output 1995 Actual output Perceived potential output lower interest rates; recession; accelerates inflation TIME O raise interest rates; boom; accelerates a recession keep interest rates the same; boom; accelerates inflation O Not enough information is given. lower interest rates; boom; increases unemployment