Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 10, Problem 6QQ
To determine
Indicators of recession.
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Consider an economy that is initially in its long-run equilibrium. Suppose this economy suffers a temporary negative supply shock. If the central bank’s sole objective is to stabilize output in the short-run, then what will happen after the central bank has responded according to its objective?
A.
Inflation will be lower, output will back at its original level
B.
Inflation will be lower, output will be lower
C.
Inflation will be higher, output will be higher
D.
Inflation will be lower, output will be higher
E.
Inflation will be higher, output will be lower
F.
Inflation will be higher, output will back at its original level
If the economy is in an inflationary gap, the Federal Reserve should conduct ______ monetary policy to ______ aggregate demand.
A)
contractionary; increase
B)
contractionary; decrease
C)
expansionary; decrease
D)
expansionary; increase
If the Federal Reserve wanted use an open market operation to combat a recession, what would they do, and what would its effect be?
The Federal Reserve expands the money supply by 5%.
Draw an aggregate supply/aggregate demand diagram to show the short run effect of this scenario. What happens to price and output? Which curve shifts? Which component of that curve accounts for the shift?
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- Which of the following describes the chain of events the Central bank uses to fight recession? A. Raise the monetary policy rate target, sell government securities, decrease reserves and loans, increase aggregate demand.B. Raise the monetary policy rate target, buy government securities, increase reserves and loans, decrease aggregate demand.C. Lower the monetary policy rate target, buy government securities, decrease reserves and loans, decrease aggregate demand.D. Lower the monetary policy rate target, buy government securities, increase reserves and loans, increase aggregate demand.arrow_forwardThe economy is currently in a supply - shock recession. Suppose the Fed decides to pursue contractionary monetary policy (hawk). What can we expect from the price and real gdp level? Prices will increase even more but output will return to full employment levels Prices will return to pre recession levels but unemployment will increase even more Prices will return to pre recession levels and unemployment will return to the natural rate Nothing will happen.arrow_forwardThe economy is currently producing at potential output. The relationship between the real interest rate and short-run output is described by an IS curve with b = 0.5. The current real interest rate is 6% and the MPK is 3%. Now suppose that a negative aggregate demand shock causes short-run output to drop to -2.25%. To stimulate investment and bring the economy back to potential output, the central bank must set the real interest rates to percent.arrow_forward
- Suppose government spending increase. Would the effect on aggregate demand be larger if the Federal Reserve held the money supply constant in response or if the Fed were committed to maintaining a fixed interest rate? Explain. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part a. If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? Now suppose the economy is back in long-run equilibrium and then the price of imported oil rises. Show the effect of this shock with a new diagram like that in part a. If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? If the Fed undertakes contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? Explain why this situation differs from that…arrow_forwardd. How does this change in profitability affect the short-run aggregate-supply curve? e. If aggregate demand is held constant, how does this shift in the aggregate-supply curve affect the price level and the quantity of out-put produced? f. Do you think this Fed chairman was a good appointment?arrow_forwardGiven a recessionary gap, the Federal Reserve will use monetary policy to __________ real GDP and aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase OD) decrease; decreasearrow_forward
- 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.arrow_forwarda) Explain what happens to Money Demand when each of the following occurs: i, incomes rise; ii. the interest rate rises. b. Use the money market to explain why the aggregate demand curve slopes downward.arrow_forwardAssume that an economy is experiencing an economic contraction and the government decides to reduce taxes and increase government spending to stimulate the economy. By the way, Central Bank keeps money supply constant. i) Evaluate the effect of this policy on the a) Interest Rate , b)Money Demand (in the SHORT-RUN.) Explain and show your answer on the graph. ii)Evaluate the effect of this policy on output and price Level (in the LONG-RUN.) Explain and show your answer on the graph. Note : In figures, please label the axis and show the changes on the graphs using arrows.arrow_forward
- Suppose the Federal Reserve decides to raise its long-run target for the rate of inflation. a. How does the Fed need to change its reaction function in order to do this? b. How will this change affect output in the short run?arrow_forwardFor this question, assume that the Fed sets monetary policy according to the Taylor rule. Suppose current U.S. macroeconomic conditions are represented by the following: π < π?* and u > un. Given this information, we would expect that the Fed will: A.implement a monetary contraction. B.more information is need to answer this question. C.maintain its current stance of monetary policy. D.implement a monetary expansion. Which of the following would cause an increase in M1? A.a reduction in the required ratio of reserves to deposits B.an increase in the discount rate C.an open market operation where the Fed buys bonds D.thes all of these E.none of thesearrow_forwardWhat might shift the aggregate-supply curve to the left? Use the model of aggregate demand and aggregate supply to trace through the short-run and long-run effects of such a shifton output and the price level? b). If the Fed wants to increase the money supply with open-market operations, what does it do?arrow_forward
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