Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134079271
Author: CASE
Publisher: PEARSON
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Question
Chapter 26, Problem 2.3P
To determine
The Fed’s tendency to the concept of “lean against the wind.”
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Suppose a wave of negative “ animal spirits” overruns the economy, and people become pessimistic about the future.What happens to aggregate demand? If the Fed wants to stabilize aggregate demand, how should it alter the money supply? If it does this, what happens to the interest rate? Why might the Fed choose not to respond in this way?
If aggregate supply is increasing at 2.5 percent a year and aggregate demand is expanding 4 percent per year, what will happen to the overall price level? What action would you anticipate from the Federal Reserve?
describe the actions the Federal Reserve took to maintain a healthy economy during the recent economic crisis. in your opinion, were the actions necessary? were the Fed’s actions effective?
Chapter 26 Solutions
Principles of Economics (12th Edition)
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- The Fed can directly affect long-term interest rate by setting the policy rate target range.True or False?arrow_forwardIn the graph you've just made, what is the unemployment rate and the inflation rate if the Fed overstimulates but the expected inflation rate remains at 2 percent? The unemployment rate _______ percent and the inflation rate _______ percent. A. decreases to 4; rises to 3 B. remains at 8; remains at 1 C. decreases to 5; rises to 4 D. decreases to 5; rises to 2arrow_forwardIn the graph you've just explored, if the Fed lowers the federal funds rate target range to 1.75 to 2.00 percent and conducts QE of $1 trillion, has the Fed done too little, too much, or got it just right to achieve full employment? A. Just right B. Too much C. Too littlearrow_forward
- Suppose that changes in bank regulations expand the availability of credit cards to that people can hold less cash. If the Fed wants to keep this price level stable, what should it do?arrow_forwardSuppose there is an increase in aggregate demand. If the fed want toarrow_forwardIn what ways does the Fed utilize their monetary policy tools to affect or counter-balance fiscal policy?arrow_forward
- Explain what types of policies the federal government may have implemented to restore aggregate demand and the potential obstacles policymakers may have encountered.arrow_forwardThe former chairman of the Federal Reserve, Alan Greenspan, used the term "irrational exuberance" in 1996 to describe the high levels of optimism among stock market investors at the time. Stock market indexes such as the S&P Composite Price Index were at an all-time high. Some commentators believed that the Fed should intervene to slow the expansion of the economy. Why would central banks want to clamp down when the economy is growing?arrow_forwardHow does government or Fed recover the economy in the short run. Please use figures and words to illustrate your explanation.arrow_forward
- When the Fed sells bonds, the amount of money in circulation in the economy_______ . This drives interest rates_________ , which causes businesses to invest________ in capital improvements such as new factories and upgraded equipment. The result is_________ in aggregate demand,________ in the equilibrium price level, and______ in the equilibrium level of real GDP.arrow_forwardWhy can’t the Fed automatically maintain full employment and low inflation?arrow_forward
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