with the the Open 13. of the associated visit by the URL on the back cover of book. WORK AJOW e For interactive, step-by-step help in solving Market Committee of the Federal Reserve, between September 18, 2007, and December 16, 2008, lowered the federal funds rate in a series of steps from a high of 5.25% to a rate between zero and 0.25%. The idea was to provide a boost to the economy by increasing aggregate demand. a. Use the liquidity preference model to explain how the Federal Open Market Committee lowers the interest rate in the short run. Draw a typical graph that illustrates the mechanism. Label the vertical axis "Interest rate" and the horizontal axis "Quantity of money." Your graph should show two interest rates, r¡ and r2. 44 b. Explain why the reduction in the interest rate causes aggregate demand to increase in the shor run. c. Suppose that in 2015 the economy is at potentia output but that this is somehow overlooked by the Fed, which continues its monetary expansic Demonstrate the effect of the policy measure o the AD curve. Use the LRAS curve to show that the effect of this policy measure on the AD cur other things equal, causes the aggregate price level to rise in the long run. Label the vertical axis “Aggregate price level" and the horizontal axis "Real GDP."
with the the Open 13. of the associated visit by the URL on the back cover of book. WORK AJOW e For interactive, step-by-step help in solving Market Committee of the Federal Reserve, between September 18, 2007, and December 16, 2008, lowered the federal funds rate in a series of steps from a high of 5.25% to a rate between zero and 0.25%. The idea was to provide a boost to the economy by increasing aggregate demand. a. Use the liquidity preference model to explain how the Federal Open Market Committee lowers the interest rate in the short run. Draw a typical graph that illustrates the mechanism. Label the vertical axis "Interest rate" and the horizontal axis "Quantity of money." Your graph should show two interest rates, r¡ and r2. 44 b. Explain why the reduction in the interest rate causes aggregate demand to increase in the shor run. c. Suppose that in 2015 the economy is at potentia output but that this is somehow overlooked by the Fed, which continues its monetary expansic Demonstrate the effect of the policy measure o the AD curve. Use the LRAS curve to show that the effect of this policy measure on the AD cur other things equal, causes the aggregate price level to rise in the long run. Label the vertical axis “Aggregate price level" and the horizontal axis "Real GDP."
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:13. of the associated
Market of the between
with the the Open
For in problem,
In which
WORK IT OUT
ABO e ag
visit LounchPod by using the URL on the back cover of this be
13. Because of the economic slowdown associated
September 18, 2007, and December 16, 2008, lowered
the federal funds rate in a series of steps from a high
of 5.25% to a rate between zero and 0.25%. The idea
was to provide a boost to the economy by increasing
aggregate demand.
a. Use the liquidity preference model to explain
how the Federal Open Market Committee lowers
the interest rate in the short run. Draw a typical
graph that illustrates the mechanism. Label the
vertical axis "Interest rate" and the horizontal
axis “Quantity of money." Your graph should
show two interest rates, r¡ and r2.
b. Explain why the reduction in the interest rate
causes aggregate demand to increase in the shor
run.
c. Suppose that in 2015 the economy is at potential
output but that this is somehow overlooked by
the Fed, which continues its monetary expansion
Demonstrate the effect of the policy measure om
the AD curve. Use the LRAS curve to show that
the effect of this policy measure on the AD curv
other things equal, causes the aggregate price
level to rise in the long run. Label the vertical
axis “Aggregate price level" and the horizontal
axis "Real GDP."
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