Question

In: Economics

If the monetary authority responds to the negative supply shock, what happens to the economy?

If the monetary authority responds to the negative supply shock, what happens to the economy? 

 A. Aggregate demand shifts left and the price level rises. 

 B. Aggregate demand shifts right and the price level falls. 

 C. Both the aggregate demand and supply curves shift to a higher price level. 

 D. Aggregate demand shifts right and the price level increases. 

 E. Aggregate supply shifts left and the price level rises.

Solutions

Expert Solution

Correct option is (D).

A negative supply shock shifts aggregate supply curve leftward, which increases price level and decreases real GDP. When monetary authority responds to this situation, it wants to increase real GDP by raising aggregate demand (by increasing money supply and decreasing interest rate, to boost investment and real GDP). So, aggregate demand curve shifts rightward, increasing price level and increasing real GDP.

Rahul Sunny answered 2 years ago
Next > < Previous

Related Solutions

What happens to the money supply and the economy when the following monetary policy actions are...
What happens to the money supply and the economy when the following monetary policy actions are taken: Reserve Requirements are increased? Reserve Requirements are decreased? The Fed sells bonds? (also called quantitative tightening) The Fed buys bonds? (also called quantitative easing) Discount rate increases? Discount rate decreases?
Explain fully the difference between a negative demand shock and a negative supply shock. Why is...
Explain fully the difference between a negative demand shock and a negative supply shock. Why is a negative supply shock worse for an economy compared with a negative demand shock? What policies are appropriate in dealing with a negative demand shock? What policies are appropriate in dealing with a negative supply shock?
How will negative supply shock affect the economy? Explain using the three equation model and Central...
How will negative supply shock affect the economy? Explain using the three equation model and Central Bank's response in controlling the same.
Consider a negative short-run aggregate supply shock hitting the economy using the Aggregate supply/aggregate demand (AS/AD)...
Consider a negative short-run aggregate supply shock hitting the economy using the Aggregate supply/aggregate demand (AS/AD) model. Give two examples of such a shock and carefully explain itsshort -run effects and the underlying reasoning (do NOT provide a diagram). Assuming policymakers ignore this shock, explain step by step what happens in the economy in the longer-term (do NOT provide a diagram). How should the central bank and/or the government respond to this shock? Carefully explain (do NOT provide a diagram)....
Consider a negative short-run aggregate supply shock hitting the economy using the Aggregate supply/aggregate demand (AS/AD)...
Consider a negative short-run aggregate supply shock hitting the economy using the Aggregate supply/aggregate demand (AS/AD) model. a. Give two examples of such a shock and carefully explain its short-run effects and the underlying reasoning (do NOT provide a diagram). b. Assuming policymakers ignore this shock, explain step by step what happens in the economy in the longer-term (do NOT provide a diagram). c. How should the central bank and/or the government respond to this shock? Carefully explain (do NOT...
Discuss supply side economics in the context of a negative temporary supply shock of the 1970s...
Discuss supply side economics in the context of a negative temporary supply shock of the 1970s a. what arte the primary supply side policies? b in your opinion does President Trump have supply side economics built into his economic platform?
Question 3: Monetary Policy Suppose the economy is in an inflationary gap, and the Fed responds...
Question 3: Monetary Policy Suppose the economy is in an inflationary gap, and the Fed responds by conducting a contractionary monetary policy. b. Explain what the Fed does if it conducts open market operations to control inflation. c. Explain the effects of this monetary policy on interest rates, business investments, consumption spending, the value of the U.S. dollar, and the value of net exports.
Monetary authority             Give the arguments for having one central monetary authority.             Who (what) puts...
Monetary authority             Give the arguments for having one central monetary authority.             Who (what) puts money in or pulls money out of the US Economy?             How do they do this?             How is money created?             Explain the money multiplier.
The Fed is the independent monetary authority for the USA. They control the money supply, interest...
The Fed is the independent monetary authority for the USA. They control the money supply, interest rates, and have big impacts on economic activity, the bond market, and inflation. Other nations have their "own" Fed. Discuss how the Fed is insulated form political pressure and how that insulation allows the Fed to do the best job possible. If there was independence and more political influence, then the Fed would be less effective.
a)Suppose the economy is hit with a negative aggregate demand shock that pushes the country into...
a)Suppose the economy is hit with a negative aggregate demand shock that pushes the country into a recession where the economy is producing less than potential output. How would automatic stabilizers affect the severity of the downturn compared to an economy without automatic stabilizers? Explain your answer. b)Name three examples of discretionary fiscal policy that could be used to combat the recession. Draw a graph to illustrate the effects of these policies in the AD‐AS model. If AD shifts, explain...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT