Suppose government spending increases. True or False: The effect on aggregate demand would be larger if the Federal Reserve held the money supply constant in response than if the Fed were committed to maintaining a fixed interest rate. True False
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- Suppose government spending increases. Would the effect on aggregate demand be larger if the central bank held the money supply constant in response or if the central bank chose to maintain a fixed interest rate? Illustrate and explainLet’s study the crowding-out effect which is triggered by a discretionary fiscal policy. How does a temporary increase in government purchase affect the interest rate based on the money supply-demand model? Why? Suppose we are having stagflation because of a supply shock. Please show the temporary increase in government purchases can restore the long-run macroeconomic equilibrium using a graph. What is the meaning of the crowding-out effect? Please show the short-run crowding out effect using a graph.Suppose government spending increases. Would the effect on aggregate demand be larger if the Federal Reserve held the money supply constant in response or if the Fed were committed to maintaining a fixed interest rate? Explain.
- Assume that a government cuts its expenditure and therefore runs a public-sector surplus. What will this mean for the equilibrium national income? What will this mean for the demand for money and to interest rates? Under what circumstances will it lead to a (i) decrease in money supply, and (ii) no change in money supply? What effect will each of the two scenarios in (III) will have on the rate of interest rate compared with its original level?The United States is at full employment when the Fed cuts the quantity of money, other things remaining the same. Which explains correctly the sequence of effects and the effect of the cut in money supply on aggregate demand? 1. We start with the money market equilibrium. The money supply curve shifts to the right and the rate of interest rises. This will decrease real investment that we can see from the Investment demand function. The AE curve will move down as investment (Ibar) declines. This will shift the AD to the left. 2. We start with the money market equilibrium. The money supply curve shifts to the left and the rate of interest rises. This will increase real investment that we can see from the Investment demand function. The AE curve will move down as investment (Ibar) declines. This will shift the AD to the left. 3. We start with the money market equilibrium. The money supply curve shifts to the left and the rate of interest rises. This will decrease real…Suppose a computer virus disables the nation's automatic teller machines, making withdrawals from bank accounts less convenient. As a result, people want to keep more cash on hand, increasing the demand for money. Assume the Fed does not change the money supply. According to the theory of liquidity preference, the interest rate will , which causes aggregate demand to . If instead the Fed wants to stabilize aggregate demand, it should the money supply by government bonds.
- When the Federal Reserve buys government securities from a bank, the money supply ________ and interest rates ________. increases; rise decreases; rise decreases; fall increases; fall1. Explain what will take place in an SRAS-AD diagram if the Fed expands the money supply. 2. Discuss what happens to bond prices when interest rate rises.Given the following information about the economy, determine the appropriate economic policy as well as the expected impact of the policy: Percent change in GDP: 7.9% Unemployment rate: 2.7% Inflation: 5.3% a The Fed should reduce the money supply by selling bonds, which will decrease the monetary base and increase the Fed Funds Rate. General interest rates will rise, and the AD curve will shift to the left. b The Fed should reduce the money supply by buying bonds, which will decrease the monetary base and increase the Fed Funds Rate. General interest rates will rise, and the AS curve will shift to the right. c The Fed should increase the money supply by buying bonds, which will increase the monetary base and decrease the Fed Funds Rate. General interest rates will remain unchanged. d The Fed should do nothing as the economy is in an expansion.
- Suppose the economy is in long-run equilibrium with GDP approaching $23T and the unemployment rate is approaching 4%. Now, let's say that the Fed has decided to decrease the money supply by 6%! The Fed proposes this move by raising the Prime Rate from the current 3.25 to 4.00 and to sell a new trunk or class of 30-year Treasury Bonds. This was not expected! What might be the short and long run effects on the economy as a whole if this were to take place? What happens to the inflation rate? What happens with unemployment? Like I said, this was actually expected that the Fed might take some sort of constriction action to stave off reduce inflation and to strengthen the money supply. However, President Biden, Congress and the Treasury Department had hoped for no contraction of the money supply until 2023.When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right. a.true b.falseAccording to the IS-LM model, a. what happens to the interest rate, income, and investment when government spending decreases? b. how the Fed should adjust the money supply to keep income at its initial level. What happens to the interest rate as a result? c. If the Fed's goal is instead to hold the interest rate constant, explain in words how the Fed should adjust the money supply when government spending decreases. What happens to income as a result? d. What is the Fed's dilemma?
