EBK MACROECONOMICS (FOURTH EDITION)
4th Edition
ISBN: 9780393616125
Author: Jones
Publisher: YUZU
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Chapter 12, Problem 2E
To determine
Nominal interest rate and the economy.
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The Tax Cuts and Jobs Act of 2017, among other things, lowered marginal tax rates across several tax brackets. During that time, the Federal Reserve raised the target for the federal funds rate. Using the IS-MP model, graphically demonstrate what should happen to the interest rate and income (real GDP) in the short run. Explain in words below your diagram.
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Hello, I need help with a macroeconomics question. Thank you in advance!
The answers are based on a short exerpt from the Federal Reserves press release from Feb 1, 2023 (attatchde below).
7. What do you expect to happen to the money supply?
8. What do you expect to happen to the inflation rate?
9. How would you expect all these decisions to affect employment in the economy?
10. How do the effects you found on 8 and 9 align with what the Fed was hoping to attain?
Chapter 12 Solutions
EBK MACROECONOMICS (FOURTH EDITION)
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- Suppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that the minimum wage increases to $15 in the United States, which affects the entire labor market and increases the cost of production. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants to keep prices in the economy as low as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."arrow_forwardExplain why during the short run, an increase in the price of oil will cause an increase in the interest rate.arrow_forwardSuppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The inflation rate C The price level C The level of technological knowledge The size of the labor force Suppose the economy produces real GDP of $70 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph. 132 128 LRAS 124 120 116 112 108 104 100 10 20 30 40 50 60 70 80 OUTPUT (Billions of dollars) Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to which will: O Shift the long-run aggregate supply curve to the right O Shift the long-run aggregate supply curve to the left O Not affect the long-run aggregate supply curve PRICE LEVELarrow_forward
- The writing assignment requires applying your knowledge of how shifts in aggregate demand (AD) and aggregate supply (AS) affect the economy. Relevant knowledge is important because shifts in AD and AS affect all aspects of an economy, including output and unemployment. Using aggregate demand and aggregate supply, explain what happens in the short run if the Federal Reserve raises interest rates in the economy? Assume that the economy is at full employment before the interest rate increase. Be sure to detail what happens to: aggregate demand the price level the level of GDP and unemployment.arrow_forwardIf the Federal Reserve wants to increase aggregate demand (i.e., spending growth) which variable (i.e. letter) in the quantity equation will it alter? Show how The Federal Reserve’s action affects the ASAD graph? Use the ASAD graph and starting with an economy that is in long run equilibrium.arrow_forwardExplain how an increase in a price level will affect the demand for money and the aggregate demand. Use relevant graphs to support your answer.arrow_forward
- In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift Many workers leave to pursue more lucrative careers in foreign economies. A scientific breakthrough significantly increases food production per acre of farmland. A natural disaster destroys a significant amount of the economy's production facilities.arrow_forwardThe graph on the right represents initial output in the short run. Suppose real interest rates fall. Using the line drawing tool, draw a new line depicting the new aggregate demand. Label this line 'D₂'. Carefully follow the instructions above and only draw the required object. C Aggregate demand, D Output (real income), Y D=Y D₁arrow_forwardSuppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship: P=A×MP=A×M • P=Price LevelP=Price Level • M=Money SupplyM=Money Supply • A=A composite of other factors, including real GDP, that change very slowly over time.A=A composite of other factors, including real GDP, that change very slowly over time. How might an economist gather empirical data to test the proposed relationship between money and the price level?arrow_forward
- The graphs illustrate an initial equilibrium for the economy. Suppose that the Federal Reserve raises interest rates. Use the graphs to show the new positions of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) in both the short run and the long run, as well as the short-run and long-run equilibriums resulting from this change. Then, indicate what happens to the price level and GDP in the short run and in the long run. Aggregate price level Short-run graph GDP In the short run, the price level LRAS Real GDP SRAS Short-run equilibrium AD and Aggregate price level Long-run graph LRAS Real GDP In the long run, the price level GDP SRAS Long-run equilibrium AD andarrow_forwardThe following set of equations describe an economy: C = 14,400 + 0.5 (Y − T) − 40,000r Ip = 8,000 − 20,000r G = 7,800 NX = 1,800 T = 8,000 Y* = 40,000 Suppose that the real interest rate (r) is 10%. Is the economy in long run equilibrium? If not, what real interest rate should central bank set to restore the economy back to the long run equilibrium? And what methods can central bank use to adjust the interest rate? (Round your answer to 2 decimal places)arrow_forwardNow, suppose the economy is back in long-run equilibrium, and then the price of imported oil rises. 1. On the following graph, shift a curve or adjust the point to reflect the short-run effect of the increase in the price of oil. (Please use the image attached) 2. True or False: If the Fed undertakes expansionary monetary policy, it can return the economy to its original inflation rate but the unemployment rate will be higher.arrow_forward
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