4. On March 1, 2020, the federal funds rate was 1.5%. Two weeks later, the federal government shuts down the economy at the onset of the coronavirus pandemic, which can be thought of as a negative aggregate demand shock. a. What open market operation should the Federal Reserve pursue in the face of a negative aggregate demand shock? b. Since the nominal federal funds rate was only 1.5%, the Federal Reserve quickly hit the effective lower bound in response to your answer in part a. What will happen to the real interest rate if the aggregate demand curve shifts left and pushes the rate of inflation below 1.5%? c. Refer to part b. What problem will occur if people's inflation expectations and wages fall, shifting SRAS right. Will that end the recession or make the recession worse? d. During COVID-19, the Federal Reserve undertook similar monetary policy actions as during the Great Recession, namely large-scale asset purchases. What effect does this have on aggregate demand/aggregate supply at the effective lower bound?

4. On March 1, 2020, the federal funds rate was 1.5%. Two weeks later, the federal government shuts down the economy at the onset of the coronavirus pandemic, which can be thought of as a negative aggregate demand shock. a. What open market operation should the Federal Reserve pursue in the face of a negative aggregate demand shock? b. Since the nominal federal funds rate was only 1.5%, the Federal Reserve quickly hit the effective lower bound in response to your answer in part a. What will happen to the real interest rate if the aggregate demand curve shifts left and pushes the rate of inflation below 1.5%? c. Refer to part b. What problem will occur if people's inflation expectations and wages fall, shifting SRAS right. Will that end the recession or make the recession worse? d. During COVID-19, the Federal Reserve undertook similar monetary policy actions as during the Great Recession, namely large-scale asset purchases. What effect does this have on aggregate demand/aggregate supply at the effective lower bound?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 3PA

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