Question

Q2   

Consider the following series of events:

A The current stock market euphoria ends and the DOW loses 4000 points over the course of two months due to declining macroeconomic prospects.

B The USA labor market tightens substantially so that inflation begins to rise and exceeds the FED target level of 2%, as output is above the ‘full employment’ level.

C Congress and the Administration are unable to agree on changes to the Affordable Care Act that would reduce the rate of growth of health spending by Medicare etc. Assume the increases in health care costs are funded by increased federal budget deficits. At the same time output growth slows due to the aging of the population.

D Because of the increase in the value of the dollar and the rapid decline in US exports and the rapid rise in its imports, the growth rate of GDP turns negative and unemployment begins to rise.

For each of these scenarios, describe a reasonable plan of action by the FED and its consequences for Y, p, I, r and N. Do these actions conflict with the perpetual goal of economic policy to encourage long run growth?

Answer 1

Ans

Fed will need to increase money supply and reduce interest rates.Y and p will rise.interest rate will fall and n increase.No it will promote long run growth

B tight monetary policy.,y and p will fall, interest will riserand n will fall.Yes it might decrease long run growth as it leds to contraction

C tight monetary policy to control inflation due to high deficit.implications on Y etc similar as in B.No deficit is not good for long run growth and thus policy is right

D expansionary monetary policy so that dollar depreciates as it increases supply of dollar.effect on Y,n etc similar as in A.will promote long run growth by stimulating exports