Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 16, Problem 1QR
To determine
Explain the inside lag and the outside lag.
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An economy is currently at point A in the graph below.
How would this economy return to equilibrium if fiscal or monetary policy were used?
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Price Level
LAS
Real Output
SAS
AD
What was the primary policy advocated by the supply siders that could achieve both lower inflation and higher unemployment?
A stimulative monetary or fiscal action should increase aggregate demand. What factors may limit the actual increase in aggregate demand?
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- As you have learned in Unit 8 (this week), monetary and fiscal policy play important roles in economic stimulation and or stabilization. In this regard: a. When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy? b. When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy? c. What specific fiscal policy tools would you use to stimulate aggregate demand and how? d. What specific monetary policy tools would you use to stimulate aggregate demand and how? e. What is your conclusion, should policymakers use the monetary and or fiscal policy to stimulate aggregate demand? Explain briefly.arrow_forwardון רבSuip Reset the graph and click on the blue square to apply a negative supply shock the the economy. Then adjust the movable point to view the effects of potential policy responses to the negative supply shock. Use what you observe to answer the questions that follow. a. In response to the effects of a negative supply shock, policymakers decide to decrease aggregate demand. What are the effects of this choice? O an increase in aggregate output, and an increase in the aggregate price level an decrease in aggregate output, and an decrease in the aggregate price level an increase in aggregate output, and an decrease in the aggregate price level an decrease in aggregate output, and an increase in the aggregate price level b. What are the overall tradeoffs with regard to this choice? Policymakers have chosen to fight inflation by increasing AD, but this further reduces aggregate output and makes the recession worse. Policymakers have chosen to fight inflation by decreasing AD, but this…arrow_forwardWhat are the definition and examples of aggregate demand?arrow_forward
- Which of the following is true of monetary policy? a. If the Fed wants to increase the money supply, it should increase the interest rate it pays banks on their reserves. b. The long and variable lags between a shift in monetary policy and when the policy shift affects output and employment makes it easier for the Fed to time monetary policy properly. c. A monetary policy that maintains price stability provides the foundation for both economic stability and the smooth operation of a market economy. d. The Fed should try to push real interest rates to the lowest possible level in order to stimulate investment and aggregate demand.arrow_forwardhow a decrease in government spending on infrastructure affect the aggregate demand curve?arrow_forwardWhat are the major factors causing a shift in aggregate demand (inward or outward)?arrow_forward
- Can you explain how positive and negative supply shocks affect market equilibrium in terms of price and quantity?arrow_forwardWhat are the inside lag and the outside lag? which policy has the longer inside lad? which policy has the longer outside lag? why?arrow_forwardWhich of the following is accurate? Select one: a. Monetary policy is neutral in both the short run and the long run. b. Monetary policy has profound effects on real variables in the long run, but is neutral in the short run. c. Monetary policy has profound effects on real variables in both the short run and the long run. d. Though monetary policy is neutral in the long run, it may have effects real variables in the short run.arrow_forward
- What is Classical and Keynesian Aggregate Supply curves And what is supply side policy. Explain with help of diagrams where needed.arrow_forwardIf the Federal Reserve wants to increase aggregate demand (i.e., spending growth) which variable (i.e. letter) in the quantity equation will it alter? Show how The Federal Reserve’s action affects the ASAD graph? Use the ASAD graph and starting with an economy that is in long run equilibrium.arrow_forwardPlease helparrow_forward
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