Answered: Assume that the Fed engages in a policy…

Assume that the Fed engages in a policy action that drives the economy above full employment. Use the AD/AS model to show the effects of this policy in both the short-run and in the long-run

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Assume that the Fed engages in a policy action that drives the economy above full employment. Use the AD/AS model to show the effects of this policy in both the short-run and in the long-run.

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Use shifts of the AD and AS curves to explain (a) the U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s and (b) how a strong negative wealth effect from, say, a precipitous drop in the stock market could cause a recession even though productivity is surging.
During 2000, there was a sharp reduction in stock prices and a sharp increase in the world price of crude oil. How will aggregate demand and aggregate supply in the United States be influenced by these two factors? Using the AD-AS model, explain the expected impact on output.
Use the AD/AS framework to explain the impact of stabilization policy to correct for a negative output gap in the short-run.
When the government or the central bank conduct expansionary fiscal or monetary policy, the aggregate demand curve of an economy may shift more or less than the initial impact. Using AD-AS model, explain the multiplier effect and crowding out effect.
Oil prices have fallen quite substantially in recent weeks. Moreover, the deveopment of new sources of oil and natueral gas is taking place throughout the U.S. Use the AD-AS model (along with a labor market graph) to show and explain how this will affect Y, N, W/P, and P over time. Does the reduction in oil prices make the Fed’s job easier or harder? Explain.
In the AD/AS model, if both inflationary expectations and business taxes increase, then the price level ___ and actual real GDP ___ and employment ___.