Question

The economy is going through a boom period with low unemployment and high inflation. Draw a...

The economy is going through a boom period with low unemployment and high inflation.

  1. Draw a graph of aggregate demand and aggregate supply to illustrate the current situation.
  2. Discuss fiscal policy measures that would help restore the economy to its natural rate of output.
  3. What kind of monetary policy will the central bank implement to reduce inflation? Describe the tools of monetary policy that can be used.
  4. Draw a graph to show the effect of the fiscal and monetary policies on output and the price level.

Homework Answers

Answer #1

As shown in graph 1

Point A shows a boom phase

Where Y1 > Y0 i.e. Output is higher than potential

Also, P1 > P0 i.e. Price levels are high as well (inflation)

Contractionary fiscal policy is good to bring back economy to normal. Tools used can be G and T (G-Government spending, T-Taxes). In contractionary policy G decreases or T increases. This will shift AD left and will reduce Output.

Contractionary fiscal policy will help bring inflation back to normal. Tools used can be

1.reserve requirement

2. policy rate

3. open market operation

For contractionary policy central bank may increase reserve requirement, may increase policy rate or may buy bonds in open market operations. All of this will reduce liquidity and inflation.

Graph 2 represents economy coming back to Normal O, after implementation of contractionary fiscal and monetary policies.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The economy is currently experiencing an economic boom with low unemployment and high output. The Federal...
The economy is currently experiencing an economic boom with low unemployment and high output. The Federal Reserve could conduct contractionary monetary policy to restore the economy to its natural rate of output. Draw and upload a graph of the Aggregate Demand and Aggregate Supply model to illustrate the impact of the contractionary monetary policy in returning the economy to the natural level of output. Be sure to carefully label all components of your graph.
The economy is currently experiencing an economic boom with low unemployment and high output. The Federal...
The economy is currently experiencing an economic boom with low unemployment and high output. The Federal Reserve could conduct contractionary monetary policy to restore the economy to its natural rate of output. Draw and upload a graph of the Aggregate Demand and Aggregate Supply model to illustrate the impact of the contractionary monetary policy in returning the economy to the natural level of output. Be sure to carefully label all components of your graph. Briefly explain how the contractionary monetary...
The economy is currently experiencing an economic boom with low unemployment and high output. The economy...
The economy is currently experiencing an economic boom with low unemployment and high output. The economy is currently experiencing an economic boom with low unemployment and high output. The Federal Reserve could conduct contractionary monetary policy to restore the economy to its natural rate of output. Draw and upload a graph of the money market to illustrate the effect of an open-market operation that would be consistent with contractionary monetary policy. Be sure to carefully label all components of your...
The economy is currently in a recession with high unemployment and low output. The Federal Reserve...
The economy is currently in a recession with high unemployment and low output. The Federal Reserve could conduct expansionary monetary policy to restore the economy to its natural rate of output. Draw and upload a graph of the Aggregate Demand and Aggregate Supply model to illustrate the impact of the expansionary monetary policy in returning the economy to the natural level of output. Be sure to carefully label all components of your graph.
The economy is currently in a recession with high unemployment and low output. The Federal Reserve...
The economy is currently in a recession with high unemployment and low output. The Federal Reserve could conduct expansionary monetary policy to restore the economy to its natural rate of output. Draw and upload a graph of the Aggregate Demand and Aggregate Supply model to illustrate the impact of the expansionary monetary policy in returning the economy to the natural level of output. Be sure to carefully label all components of your graph.
A healthy economy typically has low rates of unemployment and steady prices. Low rates of unemployment...
A healthy economy typically has low rates of unemployment and steady prices. Low rates of unemployment means that the economy is operating at its full potential. To ensure the economy continues to operate at potential GDP (full capacity where all savings are invested in production functions, and where all those who wish to work can find a job, and all other factors of production are fully utilized in the production function), governments use fiscal and monetary policies to lower unemployment...
Draw an economy in long run equilibrium. b) Suppose that the U.S. dollar depreciates. Which curve...
Draw an economy in long run equilibrium. b) Suppose that the U.S. dollar depreciates. Which curve will shift as a result of the shock? c) Illustrate the shift on your graph above. d) Explain what happens to Y, P, and unemployment in the short-run. e) State whether the economy is at a full-employment equilibrium, below full-employment equilibrium, or above full- employment equilibrium after the shock. Principles of Macroeconomics f) State whether the unemployment rate is above or below the Natural...
Consider an open economy with flexible exchange rates. Suppose that policy makers are happy with the...
Consider an open economy with flexible exchange rates. Suppose that policy makers are happy with the level of output (unemployment is at the natural rate) but that a large trade surplus has been provoking complaints from other countries. What kind of fiscal and/or monetary policy would you recommend in order to reduce the trade surplus while keeping output unchanged?
Assume that a country's economy run equilibrium and the actual unemployment lower than the natural rate...
Assume that a country's economy run equilibrium and the actual unemployment lower than the natural rate of unemployment A)This economy is in what state 1 Where is the current output level, in relation to full employment 2 is thete inflation in this economy Why or Why not B)What open-market operation can the country's central bank use to move the economy toward its long-run equilibrium C)As a result of that action above what happens to the Money Supply and equilibrium nominal...
2.    We now want to study the same fiscal policy if the economy starts at full...
2.    We now want to study the same fiscal policy if the economy starts at full employment. (i)            Draw the aggregate demand curve and the short and long run supply curves for a country in a new diagram. Assume that the country starts at full employment. (ii)           The government decides to reduce taxes to households. Illustrate in your diagram the effect on the economy of lower taxes by shifting the curve(s). Mark the new short-run equilibrium after lower taxes P2,...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT