Economics: Principles & Policy
14th Edition
ISBN: 9781337912679
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning US
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Question
Chapter 31, Problem 6DQ
To determine
The impact of lags in stabilizing the economy.
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Assume that a decrease in investment expenditures drives the economy falls below full employment. What policy should the Fed take to correct the problem? Use the AD/AS model to show the policy action.
A stimulative monetary or fiscal action should increase aggregate demand. What factors may limit the actual increase in aggregate demand?
Use the AD/AS framework to explain the impact of stabilization policy to correct for a negative output gap in the short-run.
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- Show on a graph of the AS-AD model of the economy how different fiscal and monetary policies impact on the economyarrow_forwardAssume the economy has entered a recession. Identify two fiscal and two monetary policy actions that could be used to alleviate the recession and explain how each policy would improve the economy.arrow_forwardAssume an economy is currently operating at point A. What key policy recommendations would you make for an economy like this one that is currently operating at point A? Justify why you believe this is appropriate policy.arrow_forward
- Consider the original AD/AS model in steady state. If the central bank fights against inflation more aggressively, explain how would inflation and short-run output respond differently to aggregate demand shock? (Hint: m-bar)arrow_forwardConsider an economy currently in recession. Which is NOT a policy move that could assist the economy, as discussed in class? Raising the money supply Raising government spending Lowering bank reserves Lowering interest ratesarrow_forwardWhat happens in the AD-AS model when the Federal Reserve buys government securities?arrow_forward
- By using appropriate diagrams, discuss the role of the monetary and fiscal policies in the New Keynesian sticky price model.arrow_forwardAnalyze fiscal and monetary policy in order the generate macroeconomic stability. (use graphs)arrow_forwardYou are the chair of the Federal Reserve when, because of sudden loss of consumer confidence, there is a recession. i) Which target would you focus? ii) What kind of policy would you pursue? iii) Which tools would you use, and how? iv) How would you expect your efforts to effect the economy? (use the AS/AD-IS/LM model)arrow_forward
- Why might policymakers be tempted to renege on an announcement they made earlier? In this situation, what is the advantage of a policy rule?arrow_forwardSuppose an economy experiences a period of high growth and low unemployment. Eventually output returns to its previous level, and but there is a sustained increase in the price level. In 3-5 sentences, using the AS/AD model, describe what type of shock must have occurred and what happened to the economy. Be sure to include which curve(s) must have shifted initially and which direction. Then describe what must have occured to reach the long-run outcome - in other words, which curve(s) adjusted and what happened to output, unemployment, and the price level.arrow_forwardIf an economy was in deep recession what type of demand-side policy would be most effective when the IS curve is very steep?arrow_forward
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