The economy is currently operating below full employment. Draw an ADAS graph correctly depicting our economy....

The economy is currently operating below full employment. Draw an ADAS graph correctly depicting our economy.

2. Identify the type of monetary policy (and how all the tools are adjusted) the Fed should enact in order to fix the economy.

3. Draw a money market graph correctly depicting the monetary policy you identified in number 2. Indicate how the above monetary policy would impact the above economy. Increase,Decrease, stay the same for the six below

Money supply

Interest rate

Investment

Price level

Unemployment

5. Draw the impact of the above monetary policy on the graph you drew in number 1.

Solutions

Expert Solution

Economy is currently operating below full employment. Suppose economy is initially equilibrium at point A where aggregate demand curve and aggregate supply curve intersects and determines P level of price and Y level of output.
2. Fed should enact expansionary monetary policy in order to fix the economy into full employment equilibrium by reducing interest rate to increase money supply in the economy.
Initially ISLM market is equilibrium at poiny E where IS curve and LM curve intersects and determine the r level of interest rate and Y level of output /income. If Fed implement expansionary monetary policy which shifts LM curve rightward as LM1 and it will reduce the rate of interest from r to r1 and output from Y to Y1.
As a result of exapansionary monetary policy, money supply in the economy will increase and rate of interest falls. It will reduce the cost of borrowing. Commercial bank tends to reduce the lending rate of borrowing. It encourages the business firms to borrow money from banks for investment. It will increase the investment in the economy. As a result of higher investment, employment and income level rises. It will increase the consumption. Higher investment and consumption level boost the aggregate demand of good and services. Thereby aggregate demand will increase. It results rise in general price level. Higher price level increase the nominal wages of workers. Therefore unemployment will reduce

Rahul Sunny answered 1 year ago

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