Principles of Economics - Mindtap Access
7th Edition
ISBN: 9781285852454
Author: Mankiw
Publisher: CENGAGE L
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Chapter 34, Problem 5PA
Subpart (a):
To determine
Aggregate demand and supply model when the economy is in recession.
Subpart (b):
To determine
Aggregate demand and supply model when the economy is in recession.
Subpart (c):
To determine
Aggregate demand and supply model when the economy is in recession.
Subpart (d):
To determine
Aggregate demand and supply model when the economy is in recession.
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The economy is in a recession with high unemployment and low output.A. Identify an open-market operation that would restore the economy to its natural rate.B. Use a money market graph to illustrate the effect of this open-market operation. Show the resulting change in the interest rate.C. Use 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 gra
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The graph below shows the long-run aggregate supply
(LRAS), the short-run aggregate supply (SRAS), and
aggregate demand (AD) curves for a given economy.
LRAS
10
Manipulate the curves to show the long run effect of an
increase in money supply.
9.
SRAS
8.
In the long run, an increase in the money supply will result
in the following.
6.
Real GDP:
3
AD
1
0.
01
1
4
6.
8.
6.
10
Real GDP
The aggregate price level
decreases
stays the same
increases
2.
7,
5.
Aggregate price level
Chapter 34 Solutions
Principles of Economics - Mindtap Access
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Similar questions
- 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 nature 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.arrow_forwardAssume a country’s economy is currently in recession. Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. Current real output, labeled Y1, and current price level, labeled PL1 Full employment output, labeled Yf Identify one action the central bank can take to help the economy recover from the recession. Draw a correctly labeled graph of the money market, and show the impact of the central bank’s action identified in part (b) on the nominal interest rate. On your graph for part (a), show the effect of the central bank’s action identified in part (b) on real output and the price level. Assume there is an increase in business confidence as a result of the central bank’s action. What will happen to the demand for capital goods? Draw a correctly labeled graph of the loanable funds market, and show the effect of the change identified in part (e)(i) on the real interest…arrow_forwardAssume a country’s economy is currently in recession. Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. Current real output, labeled Y1, and current price level, labeled PL1 Full employment output, labeled Yf Identify one action the central bank can take to help the economy recover from the recession. Draw a correctly labeled graph of the money market, and show the impact of the central bank’s action identified in part (b) on the nominal interest rate. On your graph for part (a), show the effect of the central bank’s action identified in part (b) on real output and the price level. Assume there is an increase in business confidence as a result of the central bank’s action. What will happen to the demand for capital goods? Draw a correctly labeled graph of the loanable funds market, and show the effect of the change identified in part (e)(i) on the real interest…arrow_forward
- If the Federal Reserve wanted use an open market operation to combat a recession, what would they do, and what would its effect be? The Federal Reserve expands the money supply by 5%. Draw an aggregate supply/aggregate demand diagram to show the short run effect of this scenario. What happens to price and output? Which curve shifts? Which component of that curve accounts for the shift?arrow_forwardWhen the money market is depicted in a diagram with the value of money on the vertical axis, which statement best describes the long-run effects of an increase in money supply? a)The price level decreases, but the quantity of money demanded increases b)The price level and the quantity of money demanded increases c)The price level and the quantity of money demanded decreases d)The price level increases, but the quantity of money demanded decreasesarrow_forwardIn 1989 the Government made it legal for banks to offer interest on checking accounts. Before this it was illegal because it could create increased competitiveness between banks and maybe lead to bank failures. Using only the asset market show graphically what we would expect to happen to the quantity of money and the interest rates if it became legal for banks to offer interest bearing checking accounts. What would this do to the overall economy? Why? How would the Federal Reserve (using information from class) stabilize the economy?arrow_forward
- By using graphs, show and explain how an increase in money supply can affect the goods market by taking the link between two markets into account.arrow_forwardMoney Supply Suppose an economy is in long-run equilibrium. The central bank reduces the money supply by 5 percent. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium. Now adjust the graph to show the new long-run equilibrium. What causes the economy to move from its short-run equilibrium to its long-run equilibrium? 1. The government increases spending to increase aggregate demand. 2. The government increases taxes to curb aggregate demand. 3. Nominal wages, prices, and perceptions adjust upward to this new price level. 4. Nominal wages, prices, and perceptions adjust downward to this new price level. Which of the following is true according to the sticky-wage theory of aggregate supply as a result of the decrease in the money supply? Check all that apply. 1. Nominal wages at the initial equilibrium are equal to nominal wages at the new short-run…arrow_forwardWhat does the term exogenous money supply mean? a. The money supply is determined by external factors b. The money supply is controlled by households c. The money supply is determined by the central bank d. The money supply is determined by market forces.arrow_forward
- a) Explain what happens to Money Demand when each of the following occurs: i, incomes rise; ii. the interest rate rises. b. Use the money market to explain why the aggregate demand curve slopes downward.arrow_forwardWhich of the following statements is true of the money supply? a) Increasing the money supply is a way of warding off an economic downturn. b) Decreasing the money supply is a way of warding off an economic downturn. c) The money supply is increased by lowering spending. d) The money supply is increased by raising taxes.arrow_forwardIf central bank increases the required reserve ratio, and at the same time the government increases the given subsidy to the exporters; then what happens to equilibrium price and output in the economy in the short-run and long - run? Sketch graph and explain your answer.arrow_forward
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