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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Explain what types of policies the federal government may have implemented to restore aggregate demand and the potential obstacles policymakers may have encountered.

To determine

Fiscal policies adopted by federal government to restore aggregate demand.

Explanation

Aggregate demand changes due to change in its components. If aggregate demand decreases, it leads to recession and if aggregate demand increases, it leads to inflation.

In case of recession, following measures are to be taken:

  1. Cut rate of interest

If rate of interest decreases, it induces firms to invest in economy as loans become cheaper. Moreover, if rate of interest decreases, it also induces consumers to save less and consume more. This is because, saving rate becomes very low.

Another way is to decrease other rates of interest in the economy.

For example, in open market operation, central bank may purchase bonds, this will lead to increase in money supply in economy, leading to increase in aggregate demand. If bonds are bought, it leads to lowering of interest rate and may encourage spending...

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