Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Y on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary, full-employment level of real GDP? A) increase aggregate demand from AD3 to AD2. B) decrease the money supply from $225 to $150 billion. C) increase interest rates from 4 to 8 percent. D) make no change in monetary policy.

The policies of the federal government influence the outcomes of the various activities in that economy.  When government policies change or unplanned events occur, the resulting economic events or activity will usually change.  Listed below is a policy or event that affect the performance of the economy: Interest rates are kept artificially low by the Federal Reserve for several years. For the question above, describe what would be the likely outcome in the economy.  Use the appropriate tools of analysis, such as aggregate demand and aggregate supply where appropriate, to justify and explain your answer.

When the housing bubble burst in 2007, home prices fell and this eliminated a large fraction of many households’ home equity. The most likely outcome of this large decrease in the value of households’ assets is: a rightward shift in the aggregate demand curve a rightward shift in the aggregate supply curve a leftward shift in the aggregate demand curve a leftward shift in the aggregate supply curve

6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output that firms supply can deviate from the natural level output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, and firms that rely on catalogs the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will will respond by the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease…