Question
In: Economics
Suppose that the economy is initally at a long run equilibrium and that prices are partially...
Suppose that the economy is initally at a long run equilibrium and
that prices are partially sticky. Then the Fed increases the money
supply.
a. Assuming any inflation to be unexpected, describe any
changes in GDP, unemployment, and inflation that are caused by the
monetary expansion. Explain your conclusions using three diagrams:
one for the IS-LM model and one for the AD-AS model.
b. Assuming instead that any resulting inflation is expected,
describe any changes in GDP, umemployment, and inflation that are
caused by the monetary expansion. Once again, explain your
conclusions using three diagrams: one for the IS-LM model and one
for the AD-AS model.
Solutions
Rahul Sunny answered 1 year agoRelated Solutions
Suppose the economy is in long-run equilibrium.
Scenario 1 - Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Scenario 1 - Pessimism. Which curve shifts and in which direction? aggregate demand shifts right aggregate demand shifts left aggregate supply shifts right. aggregate supply shifts left.
Suppose the economy is in long-run equilibrium. Then, suppose workers and firms suddenly expect higher prices...
Suppose the economy is in long-run equilibrium. Then, suppose
workers and firms suddenly expect higher prices in the future and
agree to an increase in wages. Explain the following questions
using appropriate diagrams. Describe the initial impact of this
event in the model of aggregate demand (AD) and aggregate supply
(AS) by explaining which curve shifts which way. What happens to
the price level and real output in the short run? If policymakers
wanted to move output back to the...
Suppose that the economy is at long-run equilibrium. If there is a sharp decline in the...
Suppose that the economy is at long-run equilibrium. If there is
a sharp decline in the stock market combined with a significant
increase in immigration of skilled workers, then in the short
run
a. real GDP will rise and the price level might rise, fall, or stay
the same.
b. real GDP will fall and the price level might rise, fall, or stay
the same.
c. the price level will rise, and real GDP might rise, fall, or
stay the...
Suppose the economy is in long-run equilibrium. In a short span of time, there is a...
Suppose the economy is in long-run equilibrium. In a short span
of time, there is a sharp decline in the stock market, a tax cut,
an increase in the money supply, and a decline in the value of the
dollar. In the short run, what would we expect to happen?
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...
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...
Suppose the U.S. economy was in both short-run and long-run equilibrium, until the economy experienced inflation....
Suppose the U.S. economy was in both short-run and long-run
equilibrium, until the economy experienced inflation.
a. Which policy would be consistent with the goals of monetary
policy during this time?
The Fed repos $25 billion worth of Treasury bonds to non-bank
financial firms.
The Fed reduces the discount rate from 7 percent to 5
percent.
The Fed reduces the reserve ratio from 20 percent to 15
percent.
The Fed sells securities worth $100 million to financial
institutions.
Consider an economy that begins in long-run equilibrium. Suppose that there is a wave of pessimism...
Consider an economy that begins in long-run equilibrium. Suppose
that there is a wave of pessimism that reduces investment demand at
any given real interest rate. That is, suppose that the investment
demand curve shifts down and to the left. Use the IS-LM diagram and
the aggregate supply - aggregate demand diagram to show how this
shift down of the investment demand curve affects the interest
rate, income, investment, the price level, consumption, and the
supply of real money balances...
11. Suppose that the economy is in a long run equilibrium. a.) Draw an Aggregate Supply...
11. Suppose that the economy is in a long run equilibrium. a.)
Draw an Aggregate Supply - Aggregate Demand graph of the economy.
Label the equilibrium point “E1 ". The Fed conducts an open market
sale of bonds. On your graph, show the movement of the appropriate
curves in the short-run AND long-run. Label the short run
equilibrium point “E2” and label the long run equilibrium point
“E3” b.) Draw an Aggregate Supply - Aggregate Demand graph of the
economy....
Suppose the economy is in a long-run equilibrium. a. Draw a diagram to illustrate the state...
Suppose the economy is in a long-run equilibrium.
a. Draw a diagram to illustrate the state of the economy. Be sure
to show aggregate demand, short run aggregate supply, and long-run
aggregate supply.
b. Now suppose that a stock market crash causes aggregate demand to
fall. Use your diagram to show what happens to output and the price
level in the short run. What happens to the unemployment
rate?
c. Use the sticky-wage theory of aggregate supply to explain what...
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