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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.
Principles of Macroeconomics (Mind...
Principles of Macroeconomics (Mind...
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):
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):
Identify an open market operation that would restore the economy to its natural rate.
(c):
Graphical illustration of money market.
(d):
Draw a graph which shows the effect of open market operation.
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