Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 24.3, Problem 3QQ
To determine
Pessimism about the future and aggregate
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Suppose a wave of negative “ animal spirits” overruns the economy, and people become pessimistic about the future.What happens to aggregate demand? If the Fed wants to stabilize aggregate demand, how should it alter the money supply? If it does this, what happens to the interest rate? Why might the Fed choose not to respond in this way?
An increase in the money supply will shift aggregate demand to the left.
TRUE OR FALSE?
The central bank decided to raise interest rates when it wanted to reduce aggregate demand to fight inflation. How does an increase in interest rates reduce aggregate demand?
Chapter 24 Solutions
Essentials of Economics (MindTap Course List)
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- If the Federal Reserve wanted use an open market operation to combat a recession, what would they do, and what would its effect be? The Federal Reserve expands the money supply by 5%. Draw an aggregate supply/aggregate demand diagram to show the short run effect of this scenario. What happens to price and output? Which curve shifts? Which component of that curve accounts for the shift?arrow_forwardWhy do higher interest rates reduce aggregate demand?arrow_forwardRecently, 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?arrow_forward
- Hello, I need help with a macroeconomics question. Thank you in advance! The answers are based on a short exerpt from the Federal Reserves press release from Feb 1, 2023 (attatchde below). 7. What do you expect to happen to the money supply? 8. What do you expect to happen to the inflation rate? 9. How would you expect all these decisions to affect employment in the economy? 10. How do the effects you found on 8 and 9 align with what the Fed was hoping to attain?arrow_forwardPlease answer everything in the photos including the graph.arrow_forwardExplain how an increase in a price level will affect the demand for money and the aggregate demand. Use relevant graphs to support your answer.arrow_forward
- Shift the curve on the graph to show the general impact of the central bank's new interest rate target on aggregate demand. PRICE LEVEL OUTPUT Aggregate Demand Aggregate Demand ?arrow_forwardAn increase in the interest rate discourages private firms from making new investments in factories. How does the sensitivity of investment to changes in the interest rate affect the amount by which monetary policy influences aggregate-demand?arrow_forwardSuppose that government spending is increased at the same time when an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve?arrow_forward
- Suppose that changes in bank regulations expand the availability of credit cards so that people need to hold less cash. a. How does this event affect the demand for money? b. If the Fed does not respond to this event, what will happen to the price level? c. If the Fed wants to keep the price level stable, what should it do? (Please show me the graphs. Explanations do not need to be specific.)arrow_forwardWhich of the following is NOT an example of monetary policy to restrict aggregate demand? a)Raising interest rates b)Reducing money supply c)Rationing credit d)Increasing income taxarrow_forwardThe policies of the federal government influence the outcomes of the various activities in that economy. When government policies change or unplanned events occur, the resulting economic events or activity will usually change. Listed below is a policy or event that affect the performance of the economy: Interest rates are kept artificially low by the Federal Reserve for several years. For the question above, describe what would be the likely outcome in the economy. Use the appropriate tools of analysis, such as aggregate demand and aggregate supply where appropriate, to justify and explain your answer.arrow_forward
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