Recently, some members of Congress have proposed a law that would make price stability the sole goal of monetary policy. Suppose such a law were passed. How would the Fed respond to an event that contracted aggregate demand? How would the Fed respond to an event that caused an adverse shift in short-run aggregate supply? In each case, is there another monetary policy that would lead to greater stability in output?

Expansionary monetary policy stimulates aggregate demand. In case of recessions, expansionary…

Answered: Recently, some members of Congress have…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Recently, some members of Congress have proposed a law that would make price stability the sole goal of monetary policy. Suppose such a law were passed.
1. How would the Fed respond to an event that contracted aggregate demand?
2. How would the Fed respond to an event that caused an adverse shift in short-run aggregate supply?

In each case, is there another monetary policy that would lead to greater stability in output?

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