Price level, P 2....lowers the price level in the long run... 3.... but leaves LRAS 1. A fall in aggregate demand... output the same. DIAGRAM A AD₂ Income, output, γ DIAGRAM B LM IS'
Price level, P 2....lowers the price level in the long run... 3.... but leaves LRAS 1. A fall in aggregate demand... output the same. DIAGRAM A AD₂ Income, output, γ DIAGRAM B LM IS'
Chapter17: The Trade-off Between Inflation And Unemploy
Section: Chapter Questions
Problem 1TY
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Question
“The U.S. money supply is shrinking for the first time since 1949, as savings deposits decline and
the Federal Reserve shrinks its $8 trillion balance sheet. The drop stems mostly from changes in
Fed policy and rising interest rates.”
1.1 In terms of the above statement, using the ONE most relevant diagram from below, discuss the
impact on the price level P, and income/output level Y. Include in your answer a discussion of
three (3) pros and cons each of the decision by the Fed to institute such an action.
(28)
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