PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 14, Problem 14.3CC
To determine
Illustrate the value of short-run equilibrium.
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Suppose the economy begins at full employment. Label this starting point as point "1."
Then, suppose that, due to increased instability in the financial markets, a decrease in investor and consumer confidence occurs. Show the effects on your graph and label the new equilibrium point "2."
Lastly, suppose the Federal Reserve wants the economy to return to full-employment as quickly as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."
Multiple Choice
increase the interest rate from 6 percent to 8 percent.
decrease the interest rate from 6 percent to 4 percent.
decrease the interest rate from 6 percent to 2 percent.
maintain the interest rate at 6 percent.
The Fed can directly affect long-term interest rate by setting the policy rate target range.True or False?
Chapter 14 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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- Suppose government spending increases. True or False: The effect on aggregate demand would be larger if the Federal Reserve held the money supply constant in response than if the Fed were committed to maintaining a fixed interest rate. True Falsearrow_forwardGiven an upward-sloping aggregate supply curve, which of the following is most likely to occur if the Fed sells securities in the open market, ceteris paribus? Lower average prices and full employment. Greater inflation and lower real GDP. Lower average prices and lower real GDP. Greater inflation and greater real GDP.arrow_forwardAssume that the money demand function is (M / P)d = 2,200 – 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: a. 2,000. b. 1,800. c. 1,600. d. 1,400.arrow_forward
- On June 5, 2003, the European Central Bank acted to decrease the short-term interest rate in Europe by half a percentage point, to 2 percent. The bank’s president at the time, Willem Duisenberg, suggested that, in the future, the bank could reduce rates further. The rate cut was made because European countries were growing very slowly or were in recession. What effect did the bank hope the action would have on the economy? Be specific. What was the hoped-for result on C, I, and Y?arrow_forwardINTEREST RATE (Percent) 4. The effect of monetary policy on aggregate demand Suppose the Federal Reserve ("the Fed") shifts to a contractionary monetary policy by selling bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's contractionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to INTEREST RATE (Percent) 0 ° 300 600 Money Supply Money Demand -0- Money Supply 900 1200 Money Demand 1500 1800 QUANTITY OF MONEY (Billions of dollars) The following graph shows the demand for investment. Show the short-run effect of the Fed's contractionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate…arrow_forwardConsider a scenario of a closed economy in the short run where price level is fixed. Assume that both taxes and money supply increase in a way that keep output constant in equilibrium (suppose that the marginal propensity to consume is less than one). Which of the following may result from the policy change? a) It will lead to an increase in investment but a decrease in consumption. b) It will result in an increase in investment but a decrease in government spending. c) It will lead to an increase in investment and private saving. d) It will decrease investment but increase in public saving.arrow_forward
- Consider a scenario of a closed economy in the short run where price level is fixed. Assume that both taxes and money supply increase in a way that keep output constant in equilibrium (suppose that the marginal propensity to consume is less than one). Which of the following may result from the policy change? a) It will lead to an increase in investment but a decrease in consumption.b) It will result in an increase in investment but a decrease in government spending.c) It will lead to an increase in investment and private saving.d) It will decrease investment but increase in public saving.arrow_forwardChapter 10, Stabilization Policy with Different Objectives Think about two separate Federal Reserves- Fed A and Fed B. Fed A cares only about keeping the price level stable at ¯ P and Fed B cares only about keeping output and employment at their natural levels ¯ Y. Let long-run aggregate supply (LRAS) be a function of capital and labor, Y = F(K,L), short-run aggregate supply (SRAS) be a characterized by completely sticky prices at ¯ P, and aggregate demand (AD) characterized byY = MV P . Let each Fed have control over nominal money balances M. (a) Assume both economies are currently at the long run equilibrium. Draw the long-run aggregate supply, short-run aggregate supply, and aggregate demand in equilibrium. Howwould each Fed respond both in the short-run and in the long-run to the follow ing two scenarios? (b) An exogenous permanent decrease in the velocity of moneyV ↓. (c) An exogenous temporary increase in the price of oil ¯ P ↑. In other words, oil prices return to the…arrow_forwardSuppose the economy is in long-run equilibrium, as shown on the following graph. Now suppose a wave of business pessimism reduces aggregate demand. 1. On the following graph, shift a curve or adjust the point to reflect the short-run effect of business pessimism. (Please use the image attached.) 2. If the Fed undertakes expansionary monetary policy, it can? cannot? return the economy to its original inflation rate and original unemployment rate.arrow_forward
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