We often say that responding to a negative AD shock is the easiest scenario for the Fed to respond to. However, even the response to a negative AD shock might be difficult, and it's often impossible for the Fed to increase AD the exact amount necessary to offset the shock. Why is that? In other words, why is it easy for the Fed to overshoot or undershoot their stimulus? Explain.

We often say that responding to a negative AD shock is the easiest scenario for the Fed to respond to. However, even the response to a negative AD shock might be difficult, and it's often impossible for the Fed to increase AD the exact amount necessary to offset the shock. Why is that? In other words, why is it easy for the Fed to overshoot or undershoot their stimulus? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Take a look again at Figure 1 (originally from the page in the text titled "Neoclassical and Keynesian Perspectives in the AD-AS Model.") Price Level Pn Pi Pk ADK AD Yk ADn Ek Keynesian zone Real GDP Ei LRAS En SRAS Neoclassical zone Intermediate zone Yi Yn Figure 1. Keynes, Neoclassical, and Intermediate Zones in the Aggregate Supply Curve. Near the equilibrium Ek, In the Keynesian zone at the far left of the SRAS curve, small shifts in AD, elther to the right or the left, will affect the output level Yk, but will not much affect the price level. In the Keyneslan zone, AD largely determines the quantity of output. Near the equilibrium En. In the neoclassical zone at the far right of the SRAS curve, small shifts in AD, elther to the right or the left, will have relatively little effect on the output level Yn, but Instead will have a greater effect on the price level. In the neoclassical zone, the near-vertical SRAS curve close to the level of potential GDP largely determines the…
Start with a brief introduction that explains use of Government policy to control the economy. When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy? Look at both. When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy? Look at both. What specific fiscal policy tools would you use to stimulate aggregate demand and how? What specific monetary policy tools would you use to stimulate aggregate demand and how? What is your conclusion, should policymakers use the monetary and or fiscal policy, or a combination of both, to stimulate aggregate demand? Explain your reasoning.
Using SDM, show the impact of the demand shocks on the equilibrium of the auto market. Graphically show the change in consumers, producers, and total surplus. Notes: label the relevant areas of the graph and show the change in consumers, producers, and total surplus.
Why does the aggregate demand curve slope downward and what causes the AD curve to shift?
Is an adverse supply shock likely to give rise to an inflationary gap or a recessionary gap? Why? (Hint: Draw a diagram.)
"Tax cuts are more effective in generating the economy when the economy is in recession compared to at full employment." True or False? Show and explain your answer based on the AD-AS model.
Suppose the economy begins in a short-run recessionary equilibrium. As price expectations and wages adjust and the economy moves from the short-run equilibrium to the new long-run equilibrium, a- consumer spending increases as prices fall and the AD curve shifts to the left b- consumer spending increases as prices fall and the AD curve shifts to the right c- consumer spending increases as prices fall generating a movement along the AD curve d- government spending rises as shown by a movement along the AD curve
Suppose the economy begins at potential output when the Federal Reserve lowers the federal funds interest rate. A. Graph the impact of this action using AS-AD. Note the original equilibrium as point "A" and the short-run equilibrium after the policy action as point "B". B. Graph the transition from the short run to the long run.
Suppose the economy begins at potential output when the federal government decreases taxes. A. Graph the impact of this action using AS-AD. Note the original equilibrium as point "A" and the short-run equilibrium after the policy action as point "B". B. Graph the transition from the short run to the long run.
Use an aggregate demand and aggregate supply framework to illustrate why the existence of stickiness in prices would be extremely important for predicting the potential effects of policy actions on real GDP.
We can shift the AD curve to the right by lowering taxes having the Fed buy bonds from banks lowering interest rates doing expansionary fiscal policy All listed options are correct.
What would a Keynesian likely recommend in response to a recession?