Question

4) Suppose the economy is in long-run equilibrium, with real GDP at $16 trillion and the unemployment rate at 5%, Now assume that the central bank unexpectedly decreases the money supply by 6%.

a. Illustrate the short run effects on the macro-economy by using the aggregate supply-aggregate demand model. Be sure to indicate the direction of change in Real GDP, the Price Level and the Unemployment Rate. Label all curves and axis for full credit.

5) Suppose the economy is in long-run equilibrium, with real GDP at $16 trillion and the unemployment rate at 5%. Now assume that the central bank increases the money supply by 6%.

a. Illustrate the short-run effects on the macro-economy by using the aggregate supply-aggregate demand model. Be sure to indicate the direction of change in Real GDP, the Price Level, and the Unemployment Rate. Label all curves and axis for full credit.

Answer 1

Answer:

4. central bank unexpectedly decreases the money supply by 6%:

Explanation -

The total demand for all items and services produced in the economy on the total demand is the total demand. When the central bank reduces the financial support by 6%, the real GDP will decrease. This reduces the cost of the customer, which shows the figure left below the figure from left to right, on the left side of the total demand. Eventually, the decline in real income and the price level of the economy would be reduced. Price level decreases to DOM P * P and GDP / Actual output and decreases to Y * to Y. The decrease in money supply also increases the rate of interest. Increase in actual interest rates leads to decrease of investment demand. Phillips calculates the unemployment rate and the negative relationship between inflation. Unemployment rates increase when the price level decreases

5.central bank increases the money supply by 6%:

In the long run, aggregate supply (LRAS) curve is vertical at output = $16 trillion.

Natural rate of unemployment = 5%

It is graphically shown as follows.

At the initial long run equilibrium, output is fixed at YN (= $16 trillion) at price level of P0.

Increase in money supply will cause the Aggregate demand (AD) curve to shift outward, from AD0 to AD1. In this short run equilibrium, both Price & Output will increase, pushing actual output beyond YN, to Y1.

This will push up employment (decreasing unemployment from 5%) & increase the wage rate. As input costs increase, producers will cut back on production & output will again decrease until Y = YN, but at a higher price level of P2.