Question 2: Suppose there is a recession in the economy that is caused by a sudden...

Question 2: Suppose there is a recession in the economy that is caused by a sudden change in aggregate demand. a) Show the recession on a graph. What will happen to the price level, output and unemployment? b) Assuming no government intervention, what will happen in the long-run? c) Now suppose the government decides to intervene. What can be done? Is there a trade-off decision in this case? If there is, explain. d) Let’s assume that the recession in the economy was caused by a temporary increase in oil prices which shifts the short-run aggregate supply to the left. What will happen to the price level, output and unemployment? e) Now suppose the government decides to intervene. Is there a trade-off decision in this case? If there is, explain.

Expert Solution

Rahul Sunny answered 8 months ago

2. Suppose an economy with flexible exchange rates is facing a recession and unemployment. a. Describe...

2. Suppose an economy with flexible exchange rates is facing a recession and unemployment. a. Describe in detail the mechanism that leads from a change in fiscal policy to changes in interest rates, the exchange rate, and the current account balance. b. Do the same for monetary policy. c. Explain which policy is more effective.

Suppose that the economy is in a recession and assume that the IS curve is relatively...

Suppose that the economy is in a recession and assume that the IS curve is relatively steep while the LM curve is relatively flat. Without complications from other matters, which macro policy would be more effective in the very short run to lift the economy out of recession, fiscal or monetary? Illustrate your answer in a diagram.

Suppose the economy is in a recession. Which of the following is a valid argument for...

Suppose the economy is in a recession. Which of the following is a valid argument for using expansionary fiscal policy, instead of monetary policy? Select one: a. Fiscal policy is more effective than monetary policy in a deep recession b. Fiscal policy is slower than monetary policy c. Fiscal policymakers are subject to more political influence, so some of their spending tends to be wasteful. d. Government spending could lead to lower growth through the crowding-out effect

what caused the Recession 2007-2009

Suppose the Fed would like to stimulate the economy that is In a state of recession....

Suppose the Fed would like to stimulate the economy that is In a state of recession. Discuss what are the tools that the Fed would use to stimulate the economy and what will be the impact on the different variables such as the GDP, the Investment, Consumption , level of price ect .Show your work using graphical analysis.

Suppose that the economy is currently experiencing a recession and that revenues for the current year...

Suppose that the economy is currently experiencing a recession and that revenues for the current year are equal to expenditures. a. What is the budget deficit in this case? b. How would a cyclically adjusted budget deficit be different? Explain.

Suppose the US economy is in recession. The unemployment rate is 7% and the Federal Reserve...

Suppose the US economy is in recession. The unemployment rate is 7% and the Federal Reserve Bank is considering using monetary policy to expand output. Assume the bank knows, with certainty, that: i. absent changes in monetary policy, unemployment will still be 7% next year; ii. the natural rate of unemployment is 5%; iii. from Okun's law, 1% more output growth for a year leads to a 0.4% reduction in the unemployment rate. Also assume the bank can effectively use...

Suppose an economy that starts in general equilibrium is thrown into a recession via a leftward...

Suppose an economy that starts in general equilibrium is thrown into a recession via a leftward shift in the IS curve. What type of monetary policy (expansionary or contractionary) could be beneficial in helping this economy return to general equilibrium? Why is such a policy beneficial? Are there consequences, risks or difficulties associated with implementing this policy? Discuss.

Suppose the economy is in a recession and the unemployment rate is exceptionally high. use graphical...

Suppose the economy is in a recession and the unemployment rate is exceptionally high. use graphical tools along with a "story" 4. Explain why Keynes felt “deficit spending” was an appropriate action for government if the goal is to get out of the recession, even though it may hurt the standard of living of the average worker. 5. Show that a technological breakthrough that greatly increases labor productivity could help reduce the unemployment rate without hurting the standard of living...

a. Suppose an economy was originally operating at potential output. Unfortunately, a pandemic outbreak caused the...

a. Suppose an economy was originally operating at potential output. Unfortunately, a pandemic outbreak caused the stock market to crash. In face of such stock, describe how activist monetary policy makers would respond to stabilize the economy. Explain your answer with an aggregate demand-aggregate supply diagram. b. Nonactivists argue that government action is unnecessary to eliminate the fluctuations in the economy caused by the stock market crash. Justify their argument.

Question