Question

Evaluate the current state of the U.S. economy.

• In order to complete your evaluation, you should determine the impact of recent events on the economy using AD/AS and the model of demand for money. Using the AD/AS for both the short run and the long run, depict the current state of the economy in an illustration. Numbers are not really necessary here, as long as the shapes of the curves and their behavior when faced with certain economic stimuli are correct. Use the model of demand for money to show what the impact of recent events has been on the monetary side of the economy. Has it increased or decreased interest rates? What about the demand for investment dollars? What has been its effect on the goods market?

Answer 1

Money supply in the US economy reaching its all time high since 1959. Risen money supply in the economy raises the aggregate demand in the economy because as there is more money circulation in the economy which leads to more money in the hands of people which actually raises the spending capacity in economy or raises the cash in hand limit of people in economy. The more cash people have with them, the more aggregate demand of goods is as people are more willing to spend money on goods. Rises aggregate demand raises the IS shifts to its right in short run while LM remains at the same level which raises the interest rate to i1 from i and raises the output level from Q to Q1. In long run, to take the output at its equilibrium level, Fed decreased the money supply in the economy which shifts the LM to its left which takes the interest rate to i2 and shifts output to the initial level of Q. In long run, we just have risen interest rate while output level is back at its initial level.

Interat Rate Httha - - - --- - - - - output