(b) Suppose the economy is initially above potential GDP, and the actual inflation rate is greater...

(b) Suppose the economy is initially above potential GDP, and the actual inflation rate is greater than the expected inflation rate. Use IS-LM model to explain what happens if the Bank Nagara (BNM) adjusts the interest rate to achieve the goal of price stability.

(c) If economy is initially at full employment with real GDP to potential GDP. Use the IS-LM model to explain what happens if the economy experiences a recession both with and without automatic stabilizers.

Solutions

Expert Solution

Rahul Sunny answered 1 month ago

Next > < Previous

Related Solutions

The economy begins at potential GDP with an inflation rate of 2 percent. Suppose a price...

The economy begins at potential GDP with an inflation rate of 2 percent. Suppose a price shock pushes inflation up to 6 percent in the short run, but the Fed views the effect on inflation as temporary. It expects the inflation adjustment line to shift back down to 2 percent the next year, and in fact, the inflation adjustment line does shift back down. If the Fed follows its usual policy rule, where will real GDP be in the short...

Suppose the economy is in a recession (and actual GDP is less than potential GDP). What...

Suppose the economy is in a recession (and actual GDP is less than potential GDP). What fiscal policy actions that could be taken? On the other hand, suppose the economy is experiencing high levels of inflation (and actual GDP is higher than potential GDP)… what fiscal policy actions could be taken? Is it optimal for both the Federal Reserve and the Government to take actions at the same time to “influence” and improve economic conditions? Why or why not?

Let's assume that the economy is running above its potential GDP and inflation is accelerating. The...

Let's assume that the economy is running above its potential GDP and inflation is accelerating. The Fed wants to curb the inflationary pressure. How can the Fed do so by using open market operations?. Post a brief but precise answer!

Suppose an economy is Initially in equilibrium at potential GDP, Y*. Then the government decreases the...

Suppose an economy is Initially in equilibrium at potential GDP, Y*. Then the government decreases the net tax rate (t). Briefly explain in words (1-2 sentences without a diagram) What type of gap would be caused by this policy AND the impact on real GDP and the price level in the short-run. Decreased net tax rate cause an overall decrease in real GDP, Briefly explain in words (1-2 sentences with no diagram) how the economy adjusts back to the long...

Suppose an economy is Initially in equilibrium at potential GDP, Y*. Then the government decreases the...

Suppose an economy is Initially in equilibrium at potential GDP, Y*. Then the government decreases the net tax rate (t). Briefly explain in words (1-2 sentences without a diagram) What type of gap would be caused by this policy AND the impact on real GDP and the price level in the short-run. Briefly explain in words (1-2 sentences with no diagram) how the economy adjusts back to the long run equilibrium if left alone and no further fiscal or monetary...

If actual GDP is below potential GDP, then the unemployment rate is _____________ the natural rate. A)...

If actual GDP is below potential GDP, then the unemployment rate is _____________ the natural rate. A) below B) above C) right at D) cannot be determined without inflation rate Fiscal policy affects the economy through: A) Taxes B) Government Spending C) Interest Rates D) Taxes and Government Spending The Federal Reserve Bank’s decisions on monetary policy are made by the: Board of Governors B) FOMC C) Reserve Banks D) Federal Reserve Bank of New York One of the FED’s responses to the COVID crisis has been to: Lower the...

What is difference between actual GDP & potential GDP? If actual GDP > Potential GDP are...

What is difference between actual GDP & potential GDP? If actual GDP > Potential GDP are we in boom (expansion) or bust (recession)? If actual GDP > potential GDP is unemployment higher than NAROU or lower? What is the danger of actual GDP > potential GDP? The economy can avoid this danger if what happens?

Stabilization Policy: Suppose the economy is initially above potential output. If policymakers prefer price stability and...

Stabilization Policy: Suppose the economy is initially above potential output. If policymakers prefer price stability and do not desire higher interest rates, what type of stabilization policy should it use and then briefly explain how that policy will impact the economy? Use an IS/LM graph and an aggregate demand graph to support your answer.

Suppose the economy is currently in short run macroeconomic equilibrium, with actual GDP smaller than potential...

Suppose the economy is currently in short run macroeconomic equilibrium, with actual GDP smaller than potential GDP. (a) Depict this situation using AD-AS, being sure to label all curves and axes. (b) Give an example of an automatic stabilizer, and explain how it could close the gap this economy has. (c) What open market operation could the Federal Reserve carry out, to close this gap? Show graphically the effect it would have.

If real GDP is 1 percent above potential output and inflation is simultaneously 1 percent above...

If real GDP is 1 percent above potential output and inflation is simultaneously 1 percent above the target rate according to the Taylor rule a) What should the Central Bank do in the Open market? b) Should the Central Bank bank of Turkey announce an increase or fall in the interest rate? c) How would the Central Bank of Turkey's Balance Sheet change? d) What would be the impact of this policy change on output in SR(Shortrun) MR (Mediumrun) and...

Subjects