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if the Fed’s objective is to stabilize output in the short run (using the AD-AS model) how would it react to a negative AS shock?
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- Show using an aggregate supply and demand curve diagram, how an initial increase inaggregate demand though monetary policy may have no effect on output if workers with“rational expectations” seek wage rises to compensate for the expected higher price level.Considering the efforts put forward by the Fed during the last recessionary crisis and prior, are there still any tools available to the Fed to utilize as we move from deflation into an inflationary period?Recently, some members of Congress have proposed a law that would make price stability the sole goal of monetary policy. Suppose such a law were passed. How would the Fed respond to an event that contracted aggregate demand? How would the Fed respond to an event that caused an adverse shift in short-run aggregate supply? In each case, is there another monetary policy that would lead to greater stability in output?
- How does an autonomous tightening or easing ofmonetary policy by the Fed affect the MP curve?Suppose pessimism about the future makes household consumption plummet. How would this affect the AD-AS model in the short-run, and what monetary policy could be implemented to stabilize this fluctuation? Illistrate on a diagram if possible.When the economy is hit by a real shock, some economists think that the best response is for the Fed to do nothing. They fear that there is no good response to a real shock. Why is that? Explain.
- When using the Fed model to diagnose the economy, if the output gap has shifted without much movement in the real interest rate, then the economy has been hit by _____ shock. Group of answer choices an inflation a financial a supply a spendingUse the Phelps-Friedman model to trace through the effects of a shock involving an increase in the money supply. Graphically illustrate (including an IS-LM figure) and fully explain your work.How does an autonomous tightening or easing ofmonetary policy by the Fed affect the aggregate demandcurve?
- Using the AD-AS model, draw a graph and explain the effect of the implementation of a restrictive monetary policy on the equilibrium price level and the equilibrium level of output.Suppose that government spending is increased at the same time when an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve?“Policymakers would never respond by stabilizing output in response to a temporary positive supply shock.”Is this statement true, false, or uncertain? Explain youranswer
