a) A decrease in the wealth of the people will reduce their consumption of goods and services in the economy. From the point of long-run equilibrium, the aggregate demand curve will shift to the left i.e. there will be a decrease in the output and fall in the price of goods and the unemployment will increase.
b) With a decreased aggregate demand in the economy, the federal reserve will decrease the interest rates in the economy. At a lower rate, the investment will increase and the demand will come back to the equilibrium.
c) The Federal Reserve would increase Open market operation and they will buy the bonds form the market. Or the Federal Reserve could reduce the Reserve rates or decrease the discount rates. All these steps will increase the money supply and reduce the interest rates.
Suppose that a fall in house prices decreases wealth substantially. (For simplicity, assume that the economy...
Using the liquidity preference model, suppose that the stock market crashes and everyone's wealth decreases. What is the impact on money demand (MD) and the real interest rate (r)? A MD increases; r increases B MD decreases; r decreases C MD increases; r decreases D MD decreases; r increases
Suppose a destructive wave of wildfires sweeps through the country of Tinderbox, which for the simplicity of our economic modeling is assumed to be a closed economy. Unfortunately, the fire causes the death of many of the country’s wild animals, but fortunately, no humans die and no buildings or equipment is damaged by the fires. The widespread destruction causes both autonomous consumption and autonomous investment decline. Please refer (label) the initial long-run equilibrium as point A, the new short-run equilibrium...
2. Suppose the economy begins in long-run equilibrium, then one day the President appoints a new chair of the Federal Reserve. This incoming chair is well-known for pronouncing that inflation is not a major problem for the economy. On paper, draw the Aggregate Supply/Aggregate Demand model for this economy, and show how this appointment would affect the model.
14. Consider the open-economy loanable funds model with flexible prices and capital mobility. Suppose that the world consists of a small open economy (we call this domestic) and the rest of the world (we call this foreign). Answer the following questions with the aid of figures where appropriate a. How does an increase in domestic government expenditure affect trade balance and real exchange rate? (2 points] b. How does an increase in foreign government expenditure affect the trade balance and...
2. Suppose the economy is in long-run equilibrium, with real GDP at $19 trillion and the unemployment rate at 5%. Now assume that the central bank unexpectedly decreases money supply by 6%. a) Illustrate the short-run effects of the monetary policy by using aggregate demand-aggregate supply model. Be sure to indicate the direction of change in real GDP, the price level and the unemployment rate. b) Illustrate the long-run effects of the monetary policy by using aggregate demand-aggregate supply model....
For questions 1-3 assume that the initial federal funds rate is 2.5%, the discount rate is 3.5% and the required reserve rate is 10%. 1) Suppose that the Federal Reserve makes an open market sale. How (if at all) will this affect the money supply? a. The money supply will increase b. The money supply will decrease The money supply will not be greatly affected C. 2) Suppose that the Federal Reserve decreases the required reserve rate to 6%. How...
2. The Standard IS Curve Suppose that the initial parameters of the IS curve are a = 0,6 = , r = 0.02 and the real interest rate is Ro = 0.02 initially. Explain what happens to short-run output in each of the following scenarios (consider each separately). You should be able to determine the percentage change in short-run output in each case. A. The Fed raises the real interest rate from 2 percent (R, = 0.02) to 4 percent...
1. Suppose an economy is experiencing higher inflation rate as well as a recessionary gap. Using the policy reaction function, explain whether the Reserve bank will increase or decrease the interest rate? 2. Explain the effect of an increase in imports on the equilibrium output and inflation in the AD-AS model. Carefully distinguish between the short run and the long run. Would this affect the potential output? Why/Why not? 3. Suppose capital in Country A increases from 100 in 2017...
1. Suppose an economy is experiencing higher inflation rate as well as a recessionary gap. Using the policy reaction function, explain whether the Reserve bank will increase or decrease the interest rate? 2. Explain thee effect of an increase in imports on the equilibrium output and inflation in the AD-AS model. Carefully distinguish between the short run and the long run Would this affect the potential output? Why/Why not? 3. Suppose capital in Country A increases from 100 in 2017...
1. Inflation and the Australian Economy The Australian Bureau of Statistics recently reported that there was no change in consumer prices between the start of January and end of March, equating to a quarterly inflation rate of 0%. The Reserve Bank of Australia has highlighted their concerns that inflation has been consistently lower than their target range of inflation a) Why would the RBA consider inflation that is too low to be problematic for the Australian economy? b) What measure...