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The economy is in a recession with high unemployment and low output. a. Draw a graph of aggregate demand and aggregate supply to illustrate the current situation. Be sure to include the aggregate-demand curve, the short-run aggregate-supply curve, and the long-run aggregate-supply curve. b. Identify an open-market operation that would restore the economy to its natural rate. c. Draw a graph of the money market to illustrate the effect of this open-market operation. Show the resulting change in the interest rate. d. Draw a graph similar to the one in part a to show the effect of the open-market operation on output and the price level. Explain in words why the policy has the effect that you have shown in the graph.

BuyFind

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781337091985
BuyFind

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781337091985

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Chapter
Section
Chapter 16, Problem 5PA
Textbook Problem

The economy is in a recession with high unemployment and low output.

a. Draw a graph of aggregate demand and aggregate supply to illustrate the current situation. Be sure to include the aggregate-demand curve, the short-run aggregate-supply curve, and the long-run aggregate-supply curve.

b. Identify an open-market operation that would restore the economy to its natural rate.

c. Draw a graph of the money market to illustrate the effect of this open-market operation. Show the resulting change in the interest rate.

d. Draw a graph similar to the one in part a to show the effect of the open-market operation on output and the price level. Explain in words why the policy has the effect that you have shown in the graph.

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