Question

Question 2 (1 point) Suppose the economy is initially at long run equilibrium, when there is an unexpected decrease in oil prices in the country, How does this impact the economy? (write out either "inflationary" or "recessionary" In response to this what monetary policy would the Fed employ? (write one of the following: "raise taxes", "lower taxes", "raise money supply", or "lower money supply" Ą, What is the most likely way the Fed will accomplish this change in the monetary policy? (write one of the following: "buy securities", "sell securities", "raise discount rate", "lower discount rate", or "legislation" Ą This action by the Fed will cause interest rates to (Write out "increase" or "decrease" A The end result of the monetary policy is a shift of which curve in which direction. (Write out one of the following: "AD A right", "AD left" "AS left", "AS right"

Answer 1

Suppose the economy is initially at long run equilibrium, when there is an unexpected decrease in oil prices in the country. How does this impact the economy? (write out either "inflationary" or "recessionary" Inflationary Ą In response to this what monetary policy would the Fed employ? (write one of the following: "raise taxes", "lower taxes", "raise money supply", or "lower money supply" Lower money supply Ą, What is the most likely way the Fed will accomplish this change in the monetary policy? (write one of the following: "buy securities", "sell securities", "raise discount rate", "lower discount rate", or "legislation" Ą This action by the Fed will cause interest rates to (Write out "increase" or "decrease" Ą The end result of the monetary policy is a shift of which curve in which direction. (Write out one of the following: "AD right", "AD left" "AS left", "AS right" sell securities Increase AD left

The decrease in oil prices, is going to be a positive supply shock in the economy that will make real output to be more than the potential output level that can create inflationary gap. It is resolved by Fed reducing money supply by selling securities as a part of open market operations. It raises interest rate and consumer spending decreases.  As a result, economy achieves long run equilibrium again.