Macroeconomics
Macroeconomics
13th Edition
ISBN: 9781337617390
Author: Roger A. Arnold
Publisher: Cengage Learning
Question
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Chapter 14, Problem 3WNG

(a)

To determine

Effect of demand induced inflation in self-regulating economy.

(b)

To determine

Path of the economy when the adverse supply shock is corrected with increasing aggregate demand.

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Students have asked these similar questions
When the economy is hit by a real shock, some economists think that the best response is for the Fed to do nothing. They fear that there is no good response to a real shock. Why is that? Explain.
The economy is currently in a supply - shock recession. Suppose the Fed decides to pursue contractionary monetary policy (hawk). What can we expect from the price and real gdp level? Prices will increase even more but output will return to full employment levels Prices will return to pre recession levels but unemployment will increase even more Prices will return to pre recession levels and unemployment will return to the natural rate Nothing will happen.
Suppose the economy is in a long-run equilibrium.a. Draw the economy’s short-run and long-run Phillips curves.b. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate?c. Now suppose the economy is back in long-run equilibrium, and then the price of imported oil rises. Show the effect of this shock with a new diagram like that in part (a). If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? If the Fed undertakes contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? Explain why this situation differs from that in part (b)
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