Chapter 35, Problem 5CYU

a)

To determine

What can theorists say for the conclusion if country U was experiencing a recession, and Fed started to fight it with an aggressive monetary policy and most observers concluded that this aggressive monetary expansion should provide credit to end the recession?

Explanation of Solution

From the given conclusion, theorists can contend that the Fed is not at fault because changes in the economy only occur when unanticipated policy changes occur. Also, in this case, the Fed made its strategy known to everyone which makes the changes to apply in the economy during any uncertain change of the policy required.

Economics Concept Introduction

Introduction: Price level is the average current price of goods and services in the economy that are produced in a particular interval.

The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth.

b)

To determine

What real business cycle theorists can say for the conclusion if country U was experiencing a recession, and Fed started to fight it with an aggressive monetary policy and most observers concluded that this aggressive monetary expansion should provide credit to end the recession.

Explanation of Solution

From the given conclusion, real business cycle theorists may say that factor production cycles and over time will eventually stabilize at a particular rate because random fluctuations, seasonal variations, and any change in the business life cycle have a direct impact on the growth of the economy. Using aggressive monetary policy such as a reduction in interest rates in country U to control recession would be highly competent to stabilize the economy at a certain point in time.

Economics Concept Introduction

Introduction: Price level is the average current price of goods and services in the economy that are produced in a particular interval.

The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth.