Answered: Price level, P 2....lowers the price…

Price level, P 2....lowers the price level in the long run... 3.... but leaves LRAS 1. A fall in aggregate demand... output the same. DIAGRAM A AD₂ Income, output, γ DIAGRAM B LM IS'

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter17: The Trade-off Between Inflation And Unemploy

Section: Chapter Questions

Problem 1TY

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Question

“The U.S. money supply is shrinking for the first time since 1949, as savings deposits decline and
the Federal Reserve shrinks its $8 trillion balance sheet. The drop stems mostly from changes in
Fed policy and rising interest rates.”

1.1 In terms of the above statement, using the ONE most relevant diagram from below, discuss the
impact on the price level P, and income/output level Y. Include in your answer a discussion of
three (3) pros and cons each of the decision by the Fed to institute such an action.
(28)

Price level, P
2....lowers
the price
level in the
long run...
3.... but leaves
LRAS
1. A fall in aggregate
demand...
output the same.
DIAGRAM A
AD₂
Income, output, γ
DIAGRAM B
LM
IS'

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