Question 7 Refer to the figure. In the figure, assume the initial real growth rate of the economy is 3 percent when a negative aggregate demand shock shifts the AD curve from AD, to AD,. As a result of the Fed's policy response, the AD curve shifts to AD2 in the short run. Which of the following is TRUE about the Fed's policy response? Inflation rate, LRAS SRAS ADS AD4 ► AD; AD2 AD, 3% Real growth O The Fed provided just the right amount of response to the shock. The Fed responded too much to the shock. O The Fed was too fast in responding to the shock. O The Fed responded too litle to the shock.

12. Increase in the aggregate demand and long-run aggregate supply curves Consider the dynamic aggregate demand and aggregate supply diagram for a hypothetical economy. Between 2021 and 2022, the aggregate demand curve (AD) shifts from AD₁ to AD2, the short-run aggregate supply curve (SRAS) shifts from SRAS, to SRAS2, and the long-run aggregate supply curve (LRAS) shifts from LRAS, to LRAS2. PRICE LEVEL (CPI) 110 106 LRAS, AD₁ LRAS The inflation rate between 2021 and 2022 is SRAS, 6.6 REAL GDP (Trillions of dollars) 6.8 SRAS2 AD₂2 The growth rate of full-employment output between 2021 and 2022 is (?) Which of the following best explains the economic developments from 2021 to 2022? O The economy operated at full-employment output in 2021, but the subsequent increase in aggregate demand was not enough to restore the economy to full-employment output, leading to a recessionary gap in 2022. O A strong increase in aggregate demand allowed the economy to grow out of a recessionary gap in…

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If a recession persists due to nominal wage and price stickiness (slow adjustments of nominal wages downward) what kind of monetary policy can bring us out of this recession?  contractionary monetary policy neutral monetary policy  raising interest rates and decreasing money supply growth

As monetary policymakers become more concernedwith inflation stabilization, the slope of the aggregatedemand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curvehelp stabilize inflation when the economy is hit with atemporary negative supply shock? How does this affectoutput? Use a graph of aggregate demand and supply todemonstrate.

Price level in January 2051 is 98.1

Consider the Keynesian sticky wage model. Assume that the economy is operating close to, but not at, its zero lower bound (ZLB). Discuss the following: 1. Could a negative shock to the IS curve make the ZLB bind? Explain and illustrate graph- ically. 2. Could a shock to current productivity z make the ZLB bind? What would need to be the sign of this shock to make the ZLB bind? 3. In the data, in most episodes where the ZLB binds (the US in the wake of the Great Recession, Japan during the 1990s, and the US during the Great Depression), output is low. Given this, would a supply shock as the reason for a binding ZLB make empirical sense? 4. Intuitively, explain why changes in government spending have a bigger effect on output at the ZLB than away from it.

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. O The size of the labor force O The level of technological knowledge The price level The inflation rate Suppose the economy produces real GDP of $40 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph. 132 128 LRAS 124 120 116 Q112 + PRICE LEVEL

. On 24 February 2022, Russian forces launch full-scale invasion of Ukraine.This has lead affectedbusiness confidence in the US. Show the effect on the following models given the Fed’s response   (a) IS-LM & Fed fights inflation   (b) AD-AS & Fed takes actions to support jobs

In the medium run, if government purchases are increased and nominal money supply is decreased, we can expect that   a. the interest rate will increase while aggregate demand and prices may increase, decrease, or remain the same   b. aggregate demand and prices will increase but interest rates will not change   c. aggregate demand and interest rates will decrease but prices will increase   d. aggregate demand, prices, and the interest rate will all decrease   e. the AD-curve will shift to the right and the AS-curve will shift to the left