Suppose the U.S. economy is in equilibrium at a potential output of $10 trillion so that unemployment is at the natural rate. At the beginning of the year,the Federal Reserve announces that its monetary policy will aim to maintain output at potential output and sustain the current price level throughout theyear. Firms and workers negotiate annual wage and resource price agreements based on the belief that the Fed is committed to price stability.The following graph shows the aggregate demand curve (AD), the long-run aggregate supply curve (LRAS), and the short-run aggregate supply curve(SRAS) at an expected price level of 120.Now suppose that several months later, the Fed abandons its stated goal of price stability and shifts toward an expansionary monetary policy.On the following graph, show the short-run effect of this policy by shifting the appropriate curve or curves.Note: Select and drag one, both, or all of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snapsback to its original position, just drag it a little farther.PRICE LEVEL160150140130120110100LRASSRASADAD|SRASLRAS 68 9101112QUANTITY OF OUTPUT (Trillions of dollars)713In the short run, the expansionary monetary policy will result in a price level ofO14On the previous graph show the long-run effect of the expansionary monetary policy by shifting the appropriate curve or curves.OBecause the wages workers agreed upon at the beginning of the year now buyrenegotiate wages, assuming a price level ofSuppose next year, the Fed once again announces that its monetary policy is aimed at maintaining price stability at the level reached last year (the pricelevel you found in the previous question) and output at potential output ($10 trillion). However, because the government reneged on its promise lastyear, workers and firms suspect that the Fed will again shift to an expansionary policy. As a result, in anticipation of the Fed's actions, wage rates andresource prices are negotiated in the expectation ofinflation in the current year.than had been expected in real terms, workers eventuallyWhich of the following most accurately describes the government response to new wage rates and resource price agreements and the long-termeconomic outcome?The Fed pursues a stable monetary policy, and the economy's output rises.The Fed once again shifts toward an expansionary policy, and the economy's output declines.The Fed shifts toward a restrictive policy, and the economy's output returns to potential output.The Fed once again shifts toward an expansionary policy, and the economy's output returns to potential output.Complete the following table to compare the results of an unanticipated expansionary policy to those of an anticipated expansionary policy in the shortrun and long run. Determine whether, in the short run, the unemployment rate increases, decreases, or remains unchanged relative to the natural rate

Expansionary monetary policy is a policy of a central bank to stimulate economic growth and combat…

Suppose the U.S. economy is in equilibrium at a potential output of $10 trillion so that unemployment is at the natural rate. the beginning of the year, the Federal Reserve announces that its monetary policy will aim to maintain output at potential output and sustain the current price level throughout the year. Firms and workers negotiate annual wage and resource price agreements based on the belief that the Fed is committed to price stability. The following graph shows the aggregate demand curve (AD), the long-run aggregate supply curve (LRAS), and the short-run aggregate supply curve (SRAS) at an expected price level of 120. Now suppose that several months later, the Fed abandons its stated goal of price stability and shifts toward an expansionary monetary policy. On the following graph, show the short-run effect of this policy shifting the appropriate curve or curves. Note: Select and drag one, both, or all of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps

Suppose the U.S. economy is in equilibrium at a potential output of $10 trillion so that unemployment is at the natural rate. the beginning of the year, the Federal Reserve announces that its monetary policy will aim to maintain output at potential output and sustain the current price level throughout the year. Firms and workers negotiate annual wage and resource price agreements based on the belief that the Fed is committed to price stability. The following graph shows the aggregate demand curve (AD), the long-run aggregate supply curve (LRAS), and the short-run aggregate supply curve (SRAS) at an expected price level of 120. Now suppose that several months later, the Fed abandons its stated goal of price stability and shifts toward an expansionary monetary policy. On the following graph, show the short-run effect of this policy shifting the appropriate curve or curves. Note: Select and drag one, both, or all of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter22: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 5P

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Illustrate graphically what would happen in the short run and in the long run to the price level and Real GDP if individuals hold rational expectations, prices and wages are flexible, and individuals overestimate the rise in aggregate demand (bias upward).
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Assume that a country’s economy is in a short-run equilibrium and the actual unemployment rate is lower than the natural rate of unemployment. Using a correctly labeled graph of the long-run aggregate supply curve, short-run aggregate supply curve, and aggregate demand curve, show each of the following. Current price level, labeled PL1, and current output level, labeled Y1 The full-employment output level, labeled YF. What open-market operation can the country’s central bank use to move the economy toward its long-run equilibrium? Use a correctly labeled money-market graph to show how the country’s central bank action to move the economy toward its long-run equilibrium affects the equilibrium nominal interest rate in the short run. Based on the interest rate change from part (c), will each of the following increase, decrease, or remain the same in the short run? Real output. Explain. Natural rate of unemployment Assume instead that the central bank does not pursue…
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Suppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy. This monetary policy action demand for goods and services in the economy, leading to prices for products. In the short run, the change in prices induces firms to produce goods and services. This, in turn, leads to a unemployment level. Based on this analysis, the economy faces the following trade-off between inflation and unemployment: Higher inflation leads to unemployment. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
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Assume the economy of Country X is operating above its full-employment output level. Using a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply, show the short-run equilibrium, labeling the equilibrium price level as PLe and the equilibrium output as Ye. Draw a single correctly labeled graph and show both a short-run and a long-run Phillips curve. Identify a point that could represent the short-run equilibrium in part (a) and label it as Z. Assume that the central bank of Country X wants the economy to be in full-employment equilibrium. What open-market operation should the central bank initiate? Given your answer in part (c), what will be the effect of the central bank’s open-market operation on each of the following in the short run? The nominal interest rate Employment. Explain. Assume that the real interest rate increases in Country X. Will the international value of Country X’s currency increase, decrease, or…
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Determine whether the events below will cause the aggregate demand curve to shift to the left or to the right. Assume the price level remains constant. a. Government purchases increase by $2 billion. Aggregate demand shifts (Click to select) to the right to the left . b. Real interest rates increase. Aggregate demand shifts (Click to select) to the right to the left . c. Taxes increase. Aggregate demand shifts (Click to select) to the left to the right . d. Aggregate consumption decreases as consumer confidence falls. Aggregate demand shifts (Click to select) to the right to the left .