Think about under what conditions of AD (aggregate demand), SRAS (short-run aggregate demand), and LRAS (long-run aggregate demand) the Fed would want to enact contractionary monetary policy. Draw a graph that shows AD, SRAS, and LRAS functions before and after this policy, assuming the policy brings the economy to long-run equilibrium.
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- The graph depicts a dynamic aggregate demand (AD) and aggregate supply (AS) model of the economy. Suppose that in 2003, the economy is in macroeconomic equilibrium, with GDP at GDP (year 1). The Fed projects that in 2004, the aggregate demand curve will be AD (year 2), that potential real GDP will be $12.45 trillion (GDP (year 2)), and that actual real GDP will be $12.39 trillion. By how much does projected potential real GDP exceed actual real GDP in 2004? difference: $.45 0 What could the Federal Reserve do to help the economy reach potential real GDP in 2004? trillion Conduct contractionary monetary policy to increase interest rates. Conduct expansionary monetary policy to decrease interest rates. It cannot aid the economy. Show on the graph what would change if the Fed is successful at implementing their policy. Price level LRAS (year 1) Year LRAS (year 2) Year 2 SRAS (year 1) GDP (year 1) Real GDP (trillions of $) SRAS (year 2) AD (year 1) GDP (year 2) AD (yeaUse the following diagram to answer the next question. Price Levell LRAS Y* AD1 AD2 Multiple Choice AD3 A51 Real GDP browser=0&launchUrl=https%253A 252F%252Fnewconnect.mheducation.com Assume the economy is initially at the full employment level of real GDP. If there is a decrease in imports, the Fed should increase money demand. decrease money demand SavedLet’s study the crowding-out effect which is triggered by a discretionary fiscal policy. How does a temporary increase in government purchase affect the interest rate based on the money supply-demand model? Why? Suppose we are having stagflation because of a supply shock. Please show the temporary increase in government purchases can restore the long-run macroeconomic equilibrium using a graph. What is the meaning of the crowding-out effect? Please show the short-run crowding out effect using a graph.
- In one or two sentences, explain why Keynesian economists believe that increasing the money supply will be effective at increasing aggregate demand in the short run.Question: A recent article (federalreserve.gov/econres/feds/files/2020049pap.pdf) published by the Federal Reserve (the central bank of the USA), suggests "the massive lockdown of the economy" has led to "a large negative demand shock. However, an accompanying increase in unemployment benefits has increased the income of some low-and middle-income households at least temporarily, which could helpfully support aggregate demand". The excerpt above suggests an increase in household income, which might lead to improved aggregate demand. a. Draw a diagram to explain the above situation to show the impact of increased income and how it affects aggregate demand.As you have learned in Unit 8 (this week), monetary and fiscal policy play important roles in economic stimulation and or stabilization. In this regard:What specific fiscal policy tools would you use to stimulate aggregate demand and how?What specific monetary policy tools would you use to stimulate aggregate demand and how?What is your conclusion, should policymakers use the monetary and or fiscal policy, or a combination of both, to stimulate aggregate demand? Explain your reasoning.
- What effect will a successful supply-side policy have on the aggregate demand curve? A) Leftward shift B) Rightward shift C) Movement down along D) Movement up alongSuppose the economy begins at potential output when the Federal Reserve lowers the federal funds interest rate. A. Graph the impact of this action using AS-AD. Note the original equilibrium as point "A" and the short-run equilibrium after the policy action as point "B". B. Graph the transition from the short run to the long run.Explain why the Federal Reserve is less likely to change interest rates following an increase in aggregate sunnly compared to an increase in aggregate demand.
- How does an autonomous tightening or easing ofmonetary policy by the Fed affect the aggregate demandcurve?Time remaining: 00 :09 :06 Economics If there is an inflationary gap, what should the Fed do? Explain, provide name, and show in i-M space. Consider the following macroeconomy, with fixed prices (all amounts are in millions of $): YFE = 7000 C = 40 + 0.9 YD I = 500 G = 250 T = 40 a. Calculate eqm Y in this model and then graph it in the Keynesian-cross diagram. Indicate and provide the name and size of the gap, if any. b. Prove that the appropriate relationship between I and various types of Savings holds at eqm. c. What two different policies could Congress enact? You must calculate the exact changes in the appropriate variables and provide the appropriate name(s) for the(se) policies. Graph each of these policies in the Keynesian-cross diagram. Show what your policies would do, if anything, in the money-market diagram, (in i- M space) cet. par. Indicate the initial disequilibrium and explain what will happen and why. d. Go back to the original eqm in part a. Now…If the economy is in long run economic equilibrium, at potential GDP, and full employment has been reached as well, if there is an outward shift in aggregate demand, we can expect damaging inflation to start to occur and the government to seek contractionary fiscal and monetary options. True or False