Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose...

Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose politicians believe that the current level of output is too low and encourage the central bank to engage in expansionary monetary policy.

a. (4 points) Discuss two ways in which the Central Bank can try to increase the money supply. Be explicit.

b. (6 points) What are the effects of the expansionary policy in the short run? Show in the appropriate graph(s).

c. (5 points) Which two factors determine the magnitude of the effects in the short-run?

d. (6 points) What are the effects in the long-run, assuming no further shocks to the economy? Show in the appropriate graphs.

e. (4 points) How does this example illustrate monetary neutrality? Explain your answer.

Expert Solution

Rahul Sunny answered 8 months ago

Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose...

Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose politicians believe that the current level of output is too low and encourage the central bank to engage in expansionary monetary policy. a. (4 points) Discuss two ways in which the Central Bank can try to increase the money supply. Be explicit. b. (6 points) What are the effects of the expansionary policy in the short run? Show in the appropriate graph(s). c. (5...

Question 1: The AD-AS Model Suppose the economy is initially in long-run equilibrium, and there is...

Question 1: The AD-AS Model Suppose the economy is initially in long-run equilibrium, and there is a positive demand shock. a. Describe the short-run effects of this positive demand shock on output, unemployment, and prices. b. Describe how the economy will automatically move back to the potential level of output in the long run. c. Illustrate your answers in point (a) and (b) using an AD-AS graph. Show the short-run effects and the long-run adjustments.

1. Use the AD-AS model to answer the following questions. Suppose that an economy is initially in its long-run equilibrium.

1. Use the AD-AS model to answer the following questions. Suppose that an economy is initially in its long-run equilibrium. (a) Suppose now that the interest rate rises sharply. 1. Explain what will happen to consumption and investment. 2. Graphically and verbally explain how the increase in the interest rate will change AD, LRAS, and/or SRAS and thus will change the output level and the price level in the short run. (b) Suppose now that after the...

Suppose an economy is initially at long run equilibrium. Using LRAS, SRAS and AD graphs, show...

Suppose an economy is initially at long run equilibrium. Using LRAS, SRAS and AD graphs, show this initial point and label it as A. (a) Due to terrorist attacks, the consumption expenditure decreased by $150 billion. With an MPC of 0.5, illustrate this decline in consumption on the graph in (a) and also compute the impact of the decline in consumption on output level (Y). (b) If the government wants to use taxes to restore long run equilibrium, should the government...

Assume the economy is initially in a long run equilibrium. a. Use AD-AS and Phillips curve...

Assume the economy is initially in a long run equilibrium. a. Use AD-AS and Phillips curve diagrams to show the short run effects in prices (inflation) and output (employment) if firms are pessimistic about economy in the future b. In order to maintain output what would government do with fiscal policy in response to event in part a

Consider the AS-AD model where the economy is not in long-run equilibrium, in particular, assume there...

Consider the AS-AD model where the economy is not in long-run equilibrium, in particular, assume there is a negative output gap (that is, the economy is in a recession). (a) Describe the adjustment under fixed exchange rates if there is no government intervention. (b) Contrast your answer with that under flexible exchange rates

England in 1997. Suppose the economy of England is initially in a long run equilibrium. Draw...

England in 1997. Suppose the economy of England is initially in a long run equilibrium. Draw a Keynesian Cross (AE/AP). AD/AS diagram, IS/LM diagram, and Money Market diagram for England. Label Everything

53.) Assume that the economy is initially in a long-run equilibrium. Now suppose that businesses and...

53.) Assume that the economy is initially in a long-run equilibrium. Now suppose that businesses and households become more pessimistic about the future and decide to invest less in new structures, tools, and equipment, and also decide to engage in less consumption spending, at the current price level. a.) What will happen to output and the price level in the short run? Output will (rise, fall, stay the same) and the price level will (rise, fall, stay the same). (2...

Suppose the economy is initially in the long-run equilibrium, but a drop in consumer confidence causes...

Suppose the economy is initially in the long-run equilibrium, but a drop in consumer confidence causes the AD curve to shift to the left. What will be the impact on prices and output in the short run and long run? Select the correct answer below: In the short run, and long run, both prices and output will fall. In the short run, prices will fall, but output will stay the same. In the long run, both prices and output fall....

Suppose the economy is initially in long-run equilibrium and there is a positive demand shock. Using...

Suppose the economy is initially in long-run equilibrium and there is a positive demand shock. Using the AD-AS diagram clearly describe the effects of the demand shock in the short run and how the economy will adjust through the self-correcting mechanism in the long run

Question

Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose...

Solutions

Expert Solution

Related Solutions

Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose...

Question 1: The AD-AS Model Suppose the economy is initially in long-run equilibrium, and there is...

1. Use the AD-AS model to answer the following questions. Suppose that an economy is initially in its long-run equilibrium.

Suppose an economy is initially at long run equilibrium. Using LRAS, SRAS and AD graphs, show...

Assume the economy is initially in a long run equilibrium. a. Use AD-AS and Phillips curve...

Consider the AS-AD model where the economy is not in long-run equilibrium, in particular, assume there...

England in 1997. Suppose the economy of England is initially in a long run equilibrium. Draw...

53.) Assume that the economy is initially in a long-run equilibrium. Now suppose that businesses and...

Suppose the economy is initially in the long-run equilibrium, but a drop in consumer confidence causes...

Suppose the economy is initially in long-run equilibrium and there is a positive demand shock. Using...