Bundle: Principles of Economics, Loose-leaf Version, 8th + LMS Integrated MindTap Economics, 2 terms (12 months) Printed Access Card
8th Edition
ISBN: 9781337607735
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 34, Problem 5CQQ
To determine
Crowding out effect.
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a) Explain what happens to Money Demand when each of the following occurs:
i, incomes rise;
ii. the interest rate rises.
b. Use the money market to explain why the aggregate demand curve slopes downward.
According to the IS-LM model,
a. what happens to the interest rate, income, and investment when government spending decreases?
b. how the Fed should adjust the money supply to keep income at its initial level. What happens to the interest rate as a result?
c. If the Fed's goal is instead to hold the interest rate constant, explain in words how the Fed should adjust the money supply when government
spending decreases. What happens to income as a result?
d. What is the Fed's dilemma?
When a cyber attack targeting commercial banks results in a slowdown of the check-clearing process, float tends to ________ causing the Central Bank to initiate ________ open market ________.
A. increase; defensive; sales
B. decrease; defensive; sales
C. decrease; dynamic; purchases
D. increase; dynamic; purchases
Chapter 34 Solutions
Bundle: Principles of Economics, Loose-leaf Version, 8th + LMS Integrated MindTap Economics, 2 terms (12 months) Printed Access Card
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- Suppose government spending increases. Would the effect on aggregate demand be larger if the central bank held the money supply constant in response or if the central bank chose to maintain a fixed interest rate? Illustrate and explainarrow_forwardWhen fighting a recessionary gap, central banks will amount of loans being provided by commercial banks. Select one: a. Increase; decrease b. Decrease; increase the bank rate in order toarrow_forward9. Which of the following will result in expansionary monetary or fiscal policy being the LEAST effective in increasing real GDP? A. The LRAS curve has a negative slope B. Aggregate demand is less elastic than aggregate supply C. Wages and prices are very flexible and change quickly in reaction to policy changes D. The SRAS curve is perfectly elasticarrow_forward
- The United States is at full employment when the Fed cuts the quantity of money, other things remaining the same. Which explains correctly the sequence of effects and the effect of the cut in money supply on aggregate demand? 1. We start with the money market equilibrium. The money supply curve shifts to the right and the rate of interest rises. This will decrease real investment that we can see from the Investment demand function. The AE curve will move down as investment (Ibar) declines. This will shift the AD to the left. 2. We start with the money market equilibrium. The money supply curve shifts to the left and the rate of interest rises. This will increase real investment that we can see from the Investment demand function. The AE curve will move down as investment (Ibar) declines. This will shift the AD to the left. 3. We start with the money market equilibrium. The money supply curve shifts to the left and the rate of interest rises. This will decrease real…arrow_forwardIf the Bank of Canada believes the economy is about to fall into recession, what actions should it take? If the Bank of Canada believes the inflation rate is about to increase, what actions should it take? If the Bank of Canada believes the economy is about to fall into recession, it should A. use an expansionary fiscal policy to increase the interest rate and shift AD to the right. B. use a contractionary monetary policy to lower the interest rate and shift AD to the left. OC. use its judgment to do nothing and let the economy make the self adjustment back to potential GDP. O D. use an expansionary monetary policy to lower the interest rate and shift AD to the right. If the Bank of Canada believes the inflation rate is about to increase, it should O A. use a contractionary fiscal policy to increase the interest rate and shift AD to the left. O B. use an expansionary monetary policy to lower the interest rate and shift AD to the right. OC. use a combination of tax increases and…arrow_forwardSuppose government spending increases. Would the effect on aggregate demand be larger if the Federal Reserve held the money supply constant in response or if the Fed were committed to maintaining a fixed interest rate? Explain.arrow_forward
- What is wrong (if anything) with each of the following statements? a. “In the 'Intermediate Run' an increase in the real interest rate leads to a reduction in Investment and an increase in Consumption." 5. "Because of the Classical Dichotomy, the monetary conditions in the nominal side of the economy have a direct impact on conditions in the real side of the economy." c. "In the 'Intermediate Run', the aggregate supply curve is upward sloping." d. "In the 'Intermediate Run' model, an increase (a rightward shift) in the 'IS' curve will lead to an increase in output and an increase in the real interest rat" e. "In the 'Intermediate Run' model, an increase in the technology parameter (A†) will lead to increased employment, an expansion of output, and an increase in the real interest rate." f. "In the 'Intermediate Run' model, an increase in government expenditures will lead to a permanent expansion in output." g. "Ricardian Equivalence suggests that households can infer an increase in…arrow_forwardIf the Bank of Canada conducts open-market sales, how do the money supply and the aggregate demand change? a. The money supply increases, and aggregate demand shifts left. b. The money supply decreases, and aggregate demand shifts right. c. The money supply decreases, and aggregate demand shifts left. d. The money supply increases, and aggregate demand shifts right.arrow_forwardOther things being equal, a decrease in the money supply will: A. decrease both investment spending and aggregate demand. B. decrease investment spending and increase aggregate demand. C. increase both consumption spending and aggregate demand. D. increase both investment spending and aggregate demand. E. increase investment spending and decrease aggregate demandarrow_forward
- The money supply has risen, but total spending has declined. Is this state of affairs possible? Explain your answer.arrow_forwardSuppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate supply shifts left, the central bank must a. decrease the money supply, which will move output back towards its long-run level. b. decrease the money supply, which will move output farther from its long-run level. c. increase the money supply, which will move output back towards its long-run level. d. increase the money supply, which will move output farther from its long-run level.arrow_forwardWhen the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right. a.true b.falsearrow_forward
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