EBK MACROECONOMICS (FOURTH EDITION)
4th Edition
ISBN: 9780393616125
Author: Jones
Publisher: YUZU
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Question
Chapter 14, Problem 1E
(a)
To determine
Analyze the effect of shock in the IS/MP diagram.
(b)
To determine
Policy response recommend to Federal Reserve and effect of this policy response.
(c)
To determine
Policy response recommend to Federal Reserve when the economy is in severe financial crisis.
(d)
To determine
Explain the other policy response.
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(a) Assume a temporary negative aggregate
supply shock strikes an economy. Please
explain how a central bank with a strict
inflation target will respond to this event?
Suppose the economy begins at full employment. Label this starting point as point "1."
Then, suppose that, due to increased instability in the financial markets, a decrease in investor and consumer confidence occurs. Show the effects on your graph and label the new equilibrium point "2."
Lastly, suppose the Federal Reserve wants the economy to return to full-employment as quickly as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."
6
Chapter 14 Solutions
EBK MACROECONOMICS (FOURTH EDITION)
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- 37. Supply-side economics is the school of thought that advocates the use of A) monetary policy to stimulate long-run aggregate supply. B) fiscal policy to stimulate long-run aggregate demand. C) monetary policy to stimulate short-run aggregate demand. D) fiscal policy to stimulate long-run aggregate supply.arrow_forwardA central bank carries out a contractionary open market operation.(a) What precisely does the central bank do in such an event?arrow_forwardWhat kind of problem is the U.S. economy facing? Give one possible reason why this problem may exist. State whether the Fed should use fiscal policy or monetary policy to address the situation. Given the stated policy in your answer to question #2, indicate what specific policy tool you would recommend as the appropriate course of action and why you are recommending this tool. Policy Implementation: Utilizing the figure above as your starting point, illustrate (graph) the macroeconomic situation of the United States after a successful implementation of the policy tool you’ve recommended. What are the effects on the macroeconomy on GDP and the aggregate price level?arrow_forward
- In March 2022 the Bank of Canada (BoC) increased its policy interest rate in an effort to increase interest rates throughout the economy. (d) How will aggregate demand be affected, whether we treat the economy as closed or open? (Illustrate in a diagram.) Under what circumstances would this policy be appropriate if the BoC was pursuing an inflation targeting mandate? (Illustrate in your diagram.)arrow_forwardPlease do D, E, and F!!arrow_forwardAs you have learned in Unit 8 (this week), monetary and fiscal policy play important roles in economic stimulation and or stabilization. In this regard: a. When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy? b. When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy? c. What specific fiscal policy tools would you use to stimulate aggregate demand and how? d. What specific monetary policy tools would you use to stimulate aggregate demand and how? e. What is your conclusion, should policymakers use the monetary and or fiscal policy to stimulate aggregate demand? Explain briefly.arrow_forward
- (a) Suppose that, in a liquidity trap, bank reserves are less liquid than government debt. If the central bank conducts an open market sale of government debt, what will be the effect on the price level? Use a diagram, explain your results. (b) Suppose that there is a decrease in the price of housing, which the central bank judges is a temporary asset price decrease. In the New Keynesian model, determine the central bank's optimal response to this asset price increase, using diagrams. (c) Suppose initially that inflation is at the central bank's target and the output gap is zero. Then, government spending goes up. Determine, with the aid of diagrams, how the degree of price stickiness affects the central bank's optimal response and explain your results.arrow_forwardPlease provide answer in 1 hr I will upvotearrow_forwardAnalyse the impact of these events on the price level and total output of an economy in the short term. If policymakers were to use monetary policy to actively stabilize the economy, in which direction should they move the money supply and interest rate and show the effects of these policies? Please discuss your answers with appropriate graphs. - (a) The government raises taxes and reduces expenditures to balance its budget. (b) Enterprises in the economy are pessimistic about the economy in the future. - (c) Foreigners increase their taste for domestically produced beef. (d) The money wage rate rises.arrow_forward
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