MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 15, Problem 5DQ
To determine
To describe:The reason for contrasting views on the shape of the
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Using the aggregate demand-aggregate supply diagram, graphically illustrate and explain the impact of an expansionary monetary policy on the price level and real income in the very short run.
If the Fed indicates that inflation is likely to be a concern in the near future, the public would expect that it might
Lower interest rates at its next meeting
Not change interest rates at its next meeting
Raise interest rates at its next meeting
Lower interest rates before its next meeting
Decrease the federal budget deficit at its next meeting
If the economy is in a long-run equilibrium when the Federal Reserve decides that its inflation target is too low and chooses to raise it, ________.
A) it would likely conduct a tightening of monetary policy by raising the real interest rate for any given inflation rate
B) it would likely conduct an easing of monetary policy by lowering the real interest rate for any given inflation rate
C) it would likely conduct an easing of monetary policy where the real interest rate would increase due to the ensuing decrease in aggregate demand
D) it would likely conduct a tightening of monetary policy where the real interest rate would increase due to the ensuing increase in aggregate demand
E) none of the above
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- When the Fed controls the rate of growth of the money supply to foster macroeconomic stability, this is called: A. Fiscal Policy B. Monetary Policy C. Money Supply Policy D. Fed Policyarrow_forwardThe amount of inflation caused by expansionary monetary policy depends on the slope of the aggregate supply curve. True Falsearrow_forwardRecently, 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?arrow_forward
- Explain in detail how policy rate affects aggregate demand through a monetary transmission mechanism.arrow_forwardWhen the Fed sells bonds, the amount of money in circulation in the economy_______ . This drives interest rates_________ , which causes businesses to invest________ in capital improvements such as new factories and upgraded equipment. The result is_________ in aggregate demand,________ in the equilibrium price level, and______ in the equilibrium level of real GDP.arrow_forwardExplain what types of policies the federal government may have implemented to restore aggregate demand and the potential obstacles policymakers may have encountered.arrow_forward
- An increase in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and higher interest rates resulting from an upward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve. movement up; shift left of movement up; shift right shift left of; movement up shift left of; shift right ofarrow_forwardConsider the following quote by Ed Prescott: “The policy implication of [my] research is that costly efforts at stabilization are likely to be counterproductive.” Provide a brief justification of Prescott’s view based on the results of the Real Business Cycle Theory studied in class.arrow_forward
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