Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781337091985
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 16, Problem 5CQQ
To determine
Crowding out effect.
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Suppose government spending increases. Would the effect on aggregate demand be larger if the central bank held the money supply constant in response or if the central bank chose to maintain a fixed interest rate? Illustrate and explain
Using the supply of money diagram (s), explain and demonstrate diagrammatically what happens to the interest rate, consumption, investment and aggregate demand, if the Central Bank sells government bonds to the public.
A fiscal contraction will lead toa. no change in output if the Fed simultaneously pursues contractionary monetary policy.b. a reduction in the interest rate and a reduction in investment.c. a reduction in the interest rate and an upward shift in the LM curve.d. a reduction in the interest rate and an ambiguous effect on investment.
Explain..
Chapter 16 Solutions
Brief Principles of Macroeconomics (MindTap Course List)
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- A central bank carries out a contractionary open market operation.(a) What precisely does the central bank do in such an event?arrow_forwardIf the aggregate demand parameter a in the IS curve increases, and the central bankwishes to stabilize output at potential, it should:(a) Raise the nominal interest rate.(b) Lower the nominal interest rate.(c) Buy government bonds.(d) Expand the money supply.(e) None of the above.arrow_forwardWhat happens to the aggregate demand curve when the Fed reduces the money supply? a. It shifts leftward, raising real GDP and the price level b. It shifts leftward, lowering real GDP and the price level c. It shifts rightward, raising real GDP and the price levelarrow_forward
- 6.In the New Keynesian model, a short run effect of The Fed buying bonds in the open market is a.an increase in the money supply b.a decrease in the money supply c.lower unemployment d.none of the above e.a&carrow_forwardAssume that at a Monetary Policy Committee meeting the South African Reserve Bank decides to increase the repo rate. what is the impact of a higher repo rate be on real production (Y) and pricesarrow_forwardThe economy is at full employment, but the government is disappointed with the growth rate of real GDP. It wants to increase real GDP growth by stimulating investment. At the same time, it wants to avoid an increase in the price level. a.Suggest a combination of fiscal and monetary policies that will achieve the government’s objective. b.Which policy would you recommend that the government adopt? c. Explain the mechanisms at work under your recommended policy. d.What is the effect of your recommended policy on the composition of aggregate demand? eWhat are the short-run and long-run effects of your recommended policy on real GDP and the price level?arrow_forward
- If the Bank of Canada conducts open-market sales, how do the money supply and the aggregate demand change? a. The money supply increases, and aggregate demand shifts left. b. The money supply decreases, and aggregate demand shifts right. c. The money supply decreases, and aggregate demand shifts left. d. The money supply increases, and aggregate demand shifts right.arrow_forwarda.What happens to the aggregate demand? b.What happens to the level of output? c.What happens to the price level? d. State your conclusion on the effect of the monetary policy made by the BSP.arrow_forwardWhat is the effect of a rise in the U.S. price level on the buying power of money? The buying power of money _______. A. increases and aggregate demand increases B. increases and the quantity of real GDP demanded increases C. decreases and the quantity of real GDP demanded decreases D. decreases and aggregate demand decreasesarrow_forward
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