(Module 31) The economy of Dodgelandia is experiencing an inflationary gap. a. How could the Central Bank use monetary policy to return the economy to full employment? b. Use a correctly labeled graph of the money market to show how this monetary policy would impact the equilibrium interest rate. c. Describe how the monetary policy in part (a) would affect the AD/AS graph, the aggregate price level and real GDP in Dodgelandia.

(Module 31) The economy of Dodgelandia is experiencing an inflationary gap. a. How could the Central Bank use monetary policy to return the economy to full employment? b. Use a correctly labeled graph of the money market to show how this monetary policy would impact the equilibrium interest rate. c. Describe how the monetary policy in part (a) would affect the AD/AS graph, the aggregate price level and real GDP in Dodgelandia.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter24: The Aggregate Demand/aggregate Supply Model

Section: Chapter Questions

Problem 53CTQ: The AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both...

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question 1 There are the three reasons why aggregate demand is downward slope: real wealth effect, interest rate effect, exchange rate effect. In a case scenario the market saw an increase in consumer spending when there is a boom in economy. Or the economic crisis makes the public bit shy to buy or consume any product. In the above two situations: the transfer payment does not make the part of government spending as the public will spend the money given as self-security and unemployment. Export situation gets worse as the foreigners are reluctant to buy expensive goods and the government will make some imports. The borrowing has become easy and loans are issued at a cheaper rate to buy car. Following the equation: Y = C + I + G + NX will the below examples increase or decrease the aggregate demand in Pakistan? What will be the shift in position for below situations? Widespread fear of recession The appreciation in the Pakistani Rupee rate A boom in the stock market An increase…
Problem 3 18. Which of the following would not cause a shift in the aggregate demand (AD) curve? * The government cuts taxes. Technological progress improves productivity. Expectations of a growing economy O lift business confidence and investment. The Fed chooses a more expansionary monetary policy. 19. What sequence of events results ease in aggregate demand?
4) Suppose that initially the economy is at equilibrium at a level of output, which is lower than the potential output (and so a recessionary gap exists). Suppose that the government cuts taxes in response. But because of legislative delays, the tax cut is not put in place for 18 months. Using an AD-AS diagram and assuming that the government's objective is to stabilize output and inflation, show how this policy action might actually prove to be Explain. counter-productive.
13. Using an AS/AD diagram, illustrate the effects of an aggregate supply shock. What happens in the short run to: Output? Unemployment? Price level? Explain how the economy returns to the long run level of output. What happens in the long run, if the economy self adjusts, to: Output? Unemployment? Price level? What policies could the government use to stabilize the economy? How would these policies work? What happens in the long run, if the government uses policy, to: Output? Unemployment? Price level?
Question 1 What generally is best to increase aggregate demand or GDP? • a. Lots of imports to the U.S. • b. An exchange rate which more Dollars are exchanged with fewer Euros. • c. An exchange rate which more Euros are exchanged with fewer Dollars. d. A Strong dollar Question 2 If the economy were at "D" and a strong Monetary policy of selling bonds and raising interest rates were instituted, what is there a danger of? Long-Run Aggregate Supply Short-term Aggregate Supply E D В Real GDP 1 2 3 4 • a. Recession • b. Nothing, we're OK! • . Stagflation • d. Inflation Price Level A.
Question 6 Demand management can be used by both fiscal and monetary policy. Suppose that fiscal policy makers decide to employ an expansionary policy in the aim to stimulate a weak economy. 6.1. Explain how fiscal policy can use both policy instruments at their disposal to stimulate an economy. 6.2. Based on your answer (6.1), illustrate, and explain by aid of the AD-AS model what the identified policy employment by Fiscal Authorities will have on the general price level and the level of real production and income in the economy. 6.3. Illustrate and explain by aid of the Phillips curve, how demand-pull inflation impacts the relationship between unemployment and the inflation rate. [Tip: Include arrows to illustrate the correct direction of all movements and changes in your illustration].
3) Oil prices have risen quite a bit in the last four months. Use the AD-AS model (along with a labor market graph) to show and explain how this will affect Y, N, W/P, and P over time. Does the increase in oil prices make the Fed’s job easier or harder? Explain. Finally, there has been a boom in oil and natural gas exploration and development over the last decade. Show and explain how this may impact Y, N, W/P, and P over time.
5. A consumption boom: Using the IS-MP diagram, explain what happens to the economy if there is a temporary consumption boom that lasts for one period. (a) Initially, suppose the central bank keeps the nominal interest rate unchanged. (b) Suppose you are appointed to chair the Federal Reserve. What monetary policy action would you take in this case and why? Refer to the IS-MP diagram.
4. The long-run effect of Federal Reserve action (or inaction) in the AD-AS model The following graph shows the short-run aggregate supply (SRAS) and aggregate demand (AD) curves for a fictional economy that is producing at point A (grey star symbol), which corresponds to the intersection of the AD, and SRAS₁ curves. (?) PRICE LEVEL 140 130 120 110 100 the 8 8 70 60 6 LRAS 7 SRAS SRAS, AD₂ 8 9 10 11 12 QUANTITY OF OUTPUT (Trillions of dollars) curve 13 According to the graph, actual output of this economy is AD 14 A No Intervention Intervention Along SRAS₁, wages would have been negotiated based on an expected price level of. Since the actual price level at point A is 90, this means that real wages are had been negotiated, which will unemployment. than potential output, which means that the economy experiences If the Fed does not intervene, these labor market conditions would cause nominal wages to Eventually, the economy would reach a new long-run equilibrium. shifting the On the…
In the foreign exchange market, value of the dollar has fallen. Simultaneously, businesses are feeling hesitant to undertake new real investment (“animal spirits” are down) and households are nervous about the future (Consumer Confidence Index is down) and are cutting back on consumption while they save more. What happens to the Aggregate Demand and Aggregate Supply curves of the U.S.? 1. Aggregate Supply does not change. AD has two opposing effects: exports rise due to the fall in the dollar, and both investment and consumption fall. It is not clear which effect is stronger. AD can move either to the left or to the right. 2.Aggregate Supply does not change. AD has two effects on it. Exports fall due to the fall in the dollar, and both investment and consumption also fall. AE falls and AD shifts to the left. 3.Aggregate Supply does not change. AD has two effects on it. Exports rise due to the fall in the dollar, and both investment and consumption also fall. AE falls and…
5 Using the AD-AS diagram, explain how an autonomous increase in the price of raw materials would affect output and the price level. Then, by using the same diagram, suggest and explain an appropriate policy action which can be taken by policy makers to maintain price stability.
Suppose that the US dollar was trading for 120 yen in June 2015, and then Question 6: the price of dollar decreased to 110 yen in June 2016. How would this change affect the aggregate demand schedule in Japan?