Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 27, Problem 2.5P
To determine
The role of contractionary fiscal policy and contractionary
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose that the government decides to increase government expenditure.
a) Is this a fiscal or a monetary policy?
b) Is this an expansionary or a contractionary policy?
c) How will the equilibrium output and interest rate change in goods and money markets, respectively. Explain using the diagrams.
A monetary policy that reduces the amount of money and loans in the economy is a contractionary monetary policy or a “tight” monetary policy. A monetary policy that expands the quantity of money and loans is known as an expansionary monetary policy or a “loose” monetary policy. Tight or contractionary monetary policy that leads to higher interest rates and a reduced quantity of loanable funds will reduce two components of aggregate demand. Conversely, a loose or expansionary monetary policy that leads to lower interest rates and a higher quantity of loanable funds will tend to increase business investment and consumer borrowing for big-ticket items. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins.
Note:-
Do not provide handwritten solution. Maintain…
A news headline reads, "Time for change: let free market forces determine the money supply." Which statement offers a valid claim in direct support of this headline?
Congress affects the economy through fiscal policy; controlling the money supply is unnecessary.
Congress should lose its role in fiscal policy; it often fails to influence the money supply.
The Fed is just as important as Congress, as monetary policy works differently in the economy.
The Fed should be controlled by Congress, and monetary policy should be publicly voted upon.
Chapter 27 Solutions
Principles of Economics (12th Edition)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Similar questions
- Most economists agree that individual consumers and business cannot pull the economy out of a severe recession without help from either the government or the Federal Reserve. Which group(s) believe fiscal policy is ineffective: Keynesians or Monetarists? Briefly explain the answer. Which group(s) believe monetary policy is ineffective in the short run: Keynesians or Monetarists? Briefly explain the answer. Which group(s) believe monetary policy is ineffective in the long run: Keynesians or Monetarists? Briefly explain the answer.arrow_forwardWhy would a central bank implement a monetary policy when the inflation level is higher than desired, and unemployment levels are lower than expected? Describe how a central bank might go about implementing such monetary policy, the subsequent effects this has on interest rates, the quantity of money in the market, and the process through which this affects the level of expenditure in the economy.arrow_forwardAfter a series of measures to remedy the mortgage crisis that has beset the US economy, Ben Bernanke, chairman of the Board of Governors of the Federal Reserve and his colleagues are once again looking at cutting the central bank’s key interest rate as they hope that lowering the interest rates will give the economy a boost by encouraging investors and consumers to borrow and spend (Associated Press, n. pag.). The Fed is looking at slashing the interest rate by a full percent however, many economist believe that this is not the appropriate remedy for economic conundrum (Gavin, n. pag). According to many analysts, the issue of the economy regarding the mortgage is the lack of confidence by both the lender and the borrower. Even as the Fed resorts to drastic interest cuts, the first time the central bank has cut a full percentage point in one shot since 1982, this provides little help if lenders are not loaning money out of fear they will not be repaid and the borrowers…arrow_forward
- In your own words, explain the difference between an expansionary/easy money policy and a contractionary/restrictive/tight money policy. What components are used in each policy, how and when are they used. Compare and contrast fiscal and monetary policy in terms of speed, flexibility and effectiveness in both recessions and inflation.arrow_forwardConsider the economy represented by the aggregate supply-aggregate demand graph below, which is initially at a short-run equilibrium at point A. How could monetary policy be used to improve the economy? Price level (GDP deflator. 2009-100) Pi IRASI SRASI AD₂ GDP GDP* Real GDP (trillions of 2009 dollars) Contractionary monetary policy could be used to increase economic growth. Expansionary monetary policy could be used to decrease prices. Expansionary monetary policy could be used to increase GDP to its potential. Contractionary monetary policy could be used to lower unemployment.arrow_forwardSylvia, a writer for a newspaper, interviewed top managers at 50 large corporations. All of the managers indicated that the primary determinant of planned investment is the interest rate and not their expected sales. In addition they all told her that their desired investment function is very flat. From this information, if Sylvia is a good macroeconomist, she would conclude that Group of answer choices neither expansionary nor contractionary monetary policy would be very effective. both expansionary and contractionary monetary policy would be very effective. fiscal policy would be very effective, but monetary policy would not be very effective. fiscal policy would not be very effective, but monetary policy would be very effective.arrow_forward
- How does the federal government reduce interest rate? What happens to interest rate and quantity of money as a result of expansionary monetary policy? Please explain using a diagram of interest rates vs quantity of money. showing the relevant shifts in the supply and demand curve.arrow_forwardThe following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 3.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star.arrow_forwardWhich of the following best describes the cause-effect chain of an expansionary monetary policy? A) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. B) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. D) An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.arrow_forward
- If the Federal Reserve wants to keep aggregate demand (i.e. spending growth) stable, what will it do to the growth rate of money supply when a lot of good news comes out about the economy increase it, decrease it, or leave it unchanged? Explain your answer.arrow_forwardWhich of the following best describes the conduct of monetary policy? The Fed changes interest rates so as to affect aggregate demand. The Fed changes interest rates in order to affect the money supply. The Fed changes tax rates so as to affect aggregate demand. The Fed changes the money supply in order to affect the level of interest rates.arrow_forwardThe following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 3% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. Suppose the Fed announces that it is raising its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open-market operations to (increase/decrease) the (demand for/supply for) money by (buying bonds from/selling bonds to) the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Macroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506756Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Macroeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning