ECON MACRO
5th Edition
ISBN: 9781337000529
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 16, Problem 2.3P
To determine
The short-run effects of increased money supply correctly anticipated by the people on prices, output, and employment
Concept Introduction:
Rational Expectations: Decisions made by individual agents based on the best information available and based on the past trends.
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Consider the figure below. The situation in Trombli is characterized by SRAS1 and AD1 when there is an increase in the money supply shifting the short-run aggregate supply curve to SRAS2. This will create __________ in the economy.
a. stagflationary pressure
b. a depression
c. inflationary pressure
d. recessionary pressure
Using a New Classical macroeconomic framework, critically explain the effects of a change in the unobservable component of the money supply on the price level.
Assume a country’s economy is currently in recession.
Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following.
Current real output, labeled Y1, and current price level, labeled PL1
Full employment output, labeled Yf
Identify one action the central bank can take to help the economy recover from the recession.
Draw a correctly labeled graph of the money market, and show the impact of the central bank’s action identified in part (b) on the nominal interest rate.
On your graph for part (a), show the effect of the central bank’s action identified in part (b) on real output and the price level.
Assume there is an increase in business confidence as a result of the central bank’s action.
What will happen to the demand for capital goods?
Draw a correctly labeled graph of the loanable funds market, and show the effect of the change identified in part (e)(i) on the real interest…
Chapter 16 Solutions
ECON MACRO
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- Assume a country’s economy is currently in recession. Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. Current real output, labeled Y1, and current price level, labeled PL1 Full employment output, labeled Yf Identify one action the central bank can take to help the economy recover from the recession. Draw a correctly labeled graph of the money market, and show the impact of the central bank’s action identified in part (b) on the nominal interest rate. On your graph for part (a), show the effect of the central bank’s action identified in part (b) on real output and the price level. Assume there is an increase in business confidence as a result of the central bank’s action. What will happen to the demand for capital goods? Draw a correctly labeled graph of the loanable funds market, and show the effect of the change identified in part (e)(i) on the real interest…arrow_forwardAssume the economy is currently operating at the natural rate of unemployment, what effects will using the Expansionary Monetary Policy // "stimulating the economy" have in the short run on output, price level, and interest rates? Please use the AS/AD and Money Market diagrams to illustrate your answer.arrow_forwardIn the medium run, if government purchases are increased and nominal money supply is decreased, we can expect that a. the interest rate will increase while aggregate demand and prices may increase, decrease, or remain the same b. aggregate demand and prices will increase but interest rates will not change c. aggregate demand and interest rates will decrease but prices will increase d. aggregate demand, prices, and the interest rate will all decrease e. the AD-curve will shift to the right and the AS-curve will shift to the leftarrow_forward
- Following the equation: Y = C + I + G + NX will the below examples increase or decrease the aggregate demand in Pakistan? What will be the shift in position for below situations? Widespread fear of recession (1 Mark) The appreciation in the Pakistani Rupee rate (1 Mark) A boom in the stock market (1 Mark) An increase in transfer payment (1 Mark) A decrease in real interest rate in Pakistan (1 Mark)arrow_forwardThe interest-rate effect a. depends on the idea that increases in interest rates decrease the quantity of goods and services demanded.b. depends on the idea that increases in interest rates decrease the quantity of goods and services supplied.c. is responsible for the downward slope of the money-demand curve.d. is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.arrow_forwardAccording to the model of aggregate demand and supply, in the long run an increase in the money supply would cause: a) Prices and outputs to fall b) Prices to fall and outputs to rise c) Prices to rise and outputs to fall d) Prices to rise and outputs to remain unchanged e) None of the abovearrow_forward
- If a central bank wants to counter the change in the price level caused by an adverse supply shock, it could change the money supply to shift a. aggregate demand right. b. aggregate demand left. c. aggregate supply right. d. aggregate supply left.arrow_forwardSuppose the Reserve Bank of India (RBI) is planning to increase the output (Y). Inorder to do so the central bank increases the money supply in the economy. With this in view, keeping the velocity of money constant and assuming the quantity theory of money what happens to the AD curve. Explain the answer with an appropriate diagram and proper economic intuition.arrow_forward
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