Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 34.1, Problem 1QQ
To determine
Liquidity preference theory, interest rate, and aggregate demand .
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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?
Suppose the Fed decides to implement expansionary monetary policy. This will likely result in a _____ in the money supply and a _____ in interest rates.
increase or decrease?
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 34 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- How does aggregate demand affect inflation? How do interest rates affect 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_forwardIf 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_forward
- Critically analyze what facts determine the impact of an interest rate change? How effective is monetary policy?arrow_forwardSuppose 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.arrow_forwardIf 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_forward
- Economics Suppose that a large bank borrowed $1 billion from the Federal Reserve for one week. How would this change the monetary base? If the Federal Reserve did not want the monetary base to change, what would it do? Explain your reasoning.arrow_forwardIf the economy is able to self-correct from a negative GDP gap, why might the Fed wish to intervene in the market?arrow_forwardSuppose there is an increase in money demand because of a stock market boom that raises people’s wealth. Draw the money market model to show the stock market boom impact on the interest rate. Will investment and consumption increase or decrease because of this event? What should Fed do if it wants to maintain the original interest rate? Show the impact of the Fed’s action in the graph of part a. Will investment and consumption still change if the Fed takes its action?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 money supply will shift aggregate demand to the left. TRUE OR FALSE?arrow_forward“Monetary policy is the macroeconomic policy laid down by the central bank of an economy.”In terms of the above statement, explain how monetary policy can be used to combat inflationarrow_forward
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