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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.

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Principles of Macroeconomics (Mind...

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781285165912

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Chapter
Section
BuyFindarrow_forward

Principles of Macroeconomics (Mind...

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781285165912
Chapter 21, Problem 5PA
Textbook Problem
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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.

(a):

To determine

Graphical illustration of demand and supply model when the economy is in recession.

Explanation of Solution

Figure 1 illustrates the equilibrium position.

Figure 1 illustrates the aggregate demand and supply model when the economy is in recession...

(b):

To determine

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

(c):

To determine

Graphical illustration of money market.

(d):

To determine

Draw a graph which shows the effect of open market operation.

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