Assume that the /S-MP model on the right shows an economy that was in long-run macroeconomic equilibrium. Then, there was a significant positive demand shock. 1.) Using the 3-point curved line drawing tool, show the effect of the positive demand shock. Properly label your curve. 2.) Using the line drawing tool, show how the Fed might respond to restore long-run equilibrium. Properly label your curve. Carefully follow the instructions above, and only draw the required objects. Real interest rate Y=YP 0 MP₁ IS₁ Output gap Q Q

Assume that the /S-MP model on the right shows an economy that was in long-run macroeconomic equilibrium. Then, there was a significant positive demand shock. 1.) Using the 3-point curved line drawing tool, show the effect of the positive demand shock. Properly label your curve. 2.) Using the line drawing tool, show how the Fed might respond to restore long-run equilibrium. Properly label your curve. Carefully follow the instructions above, and only draw the required objects. Real interest rate Y=YP 0 MP₁ IS₁ Output gap Q Q

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter10: Dynamic Change, Economic Fluctuations, And The Ad-as Model

Section: Chapter Questions

Problem 1CQ

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8a. Assume that an economy is at equilibrium at its potential GDP at $10 trillion and aprice level of 100. What would be the short-run impact of a significant fall in consumer confidence about the future? Provide an AD/AS model to support your answer. b. What policy would you recommend to the chairperson of the Federal Reserve? Be specific. Show the effect of this policy on your graph part a. c. What are the major goals of the Fed's monetary policy?
1. Consider an economy in long-run equilibrium at P1,Y*. Demand for money decreases. What will be the new long-run equilibrium? Group of answer choices Price will be higher than P1 and output will be equal to the natural output. Price will be higher than P1 and output will be smaller than the natural output. 2.What should be the optimal policy response to a negative demand shock according to a neoclassical economist? Group of answer choices The government should lower the interest rate to shift the AD to the right The central bank should enact an expansionary monetary policy to move back the AD to the initial position The government should lower wages to accommodate the adjustment of the AS curve None. The economy will self adjust and there is no need of intervention. Price will be higher than P1 and output will be higher than the natural output. Price will be lower than P1 and output will be equal to the natural output.
2. The graph below shows the AD-AS model in short-run equilibrium at a price level, Po, and a level of real GDP, Yo. Label the following: both axes, AD, SRAS, LRAS, Po, Yo, and Yp. A. Is this SR equilibrium a recessionary gap or an inflationary gap? * C. Explain carefully how the changes in part B eventually alter AD. Explain each step. B. Assume the Fed decides to act. How would you suggest they use or alter each of the following? - Open Mkt Operations - Required Reserve Ratio - Discount/Federal Funds Rates D. Show the effects of these changes in the space above. Assume this intervention brings the economy back to potential GDP. E. As the economy moves from Yo to Yê, what happens to the following measures of the aggregate economy? - the unemployment rate - the rate of inflation - Real GDP - The price level
The usual analytical method in macroeconomics is to begin in long-run equilibrium, shock the economy, hold all else equal, and then evaluate how the economy responds to that single shock until it returns to equilibrium. 1. Identify the forces at work in the economy's re- equilibration process. 2.Comment on whether the zero-output gap will occur at the same trend level of output or a lower level in the new equilibrium. Why might this matter?
Throughout much of the current year 2020, Canada has been experiencing declining energy prices. Assume that the Canadian economy was in long-run equilibrium before these declines began. 1.Use the aggregate demand–aggregate supply model to illustrategraphically the short-run and long-run impact of this decline on output and prices. 2. If the Bank of Canada attempted to offset this deviation from the naturalrate in the short run, should the money supply be increased or decreased?
The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by decreasing government purchases to restore full-employment GDP. Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ -160 Numeric ResponseEdit Unavailable. -160 incorrect. billion b. If the MPC is 0.9, how much do government purchases need to change to shift aggregate demand by the amount you found in part a? $ billion Suppose instead that the MPC is 0.8. c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and government purchases need to change by $ billion.
We often say that responding to a negative AD shock is the easiest scenario for the Fed to respond to. However, even the response to a negative AD shock might be difficult, and it's often impossible for the Fed to increase AD the exact amount necessary to offset the shock. Why is that? In other words, why is it easy for the Fed to overshoot or undershoot their stimulus? Explain.
Refer to the diagram to the right. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD- AS model, this would be depicted as a movement from OA. C to B. OB. C to D. OC. B to C. OD. A to B. OE. A to E. Price leve A LRAS B D E C Real GDP AD ₁ SRAS AD 3 AD 2
i need in your own words point to point answer Draw the IS-LM and AD-AS diagrams and explain the following: a. Suppose Fed increases M. Show the short-run effects on your graphs.b. Show what happens in the transition from the short run to the long run.c. How do the new long-run equilibrium values of the endogenous variables compare to their initial values?
ון רבSuip Reset the graph and click on the blue square to apply a negative supply shock the the economy. Then adjust the movable point to view the effects of potential policy responses to the negative supply shock. Use what you observe to answer the questions that follow. a. In response to the effects of a negative supply shock, policymakers decide to decrease aggregate demand. What are the effects of this choice? O an increase in aggregate output, and an increase in the aggregate price level an decrease in aggregate output, and an decrease in the aggregate price level an increase in aggregate output, and an decrease in the aggregate price level an decrease in aggregate output, and an increase in the aggregate price level b. What are the overall tradeoffs with regard to this choice? Policymakers have chosen to fight inflation by increasing AD, but this further reduces aggregate output and makes the recession worse. Policymakers have chosen to fight inflation by decreasing AD, but this…
The Short-Run Aggregate Supply Curve (AS) is given by: y=20pAnd the Short-Run Aggregate Demand Curve (AD) is given by: y=25,000−20p Suppose instead that the Central Bank wanted to take action to keep the price-level completely stable. This would entail keeping it constant at its current rate. Suppose also that the Central Bank targets the interest rate directly. Suppose also that: • The Marginal Propensity to Spend is 0.75. • Every 1% increase in the interest rate leads to a decrease in Autonomous Consumption of 250 and a decrease in Autonomous Investment of 250. How much would the Central Bank need to change the current interest rate in order to keep the price level from changing through the medium-term as this output gap closes in the economy?
In this section, the context is a large negative shock to autonomous consumption in an open economy. You may assume the economy is initially at a medium run equilibrium. (a) Aggregate demand can decline for many reasons. Give a specific example of when you would choose to model the onset of a recession by a fall in autonomous consumption and explain why. (b) Provide two different scenarios in which the macroeconomic policy response to the shock in an op economy includes the use of expansionary fiscal policy, Explain your reasoning, the policy chosen and describe how the economy adjusts to medium-run equilibrium. Refer to real world examples.