Question

Assume firms become pessimistic about future profitability of spending on new informational technology. With everything else...

Assume firms become pessimistic about future profitability of spending on new informational technology. With everything else constant, this causes the output gap to become______ and inflation rate to_______. In order for the output gap to return back to zero and inflation rate to return back to its original rate, the Fed should ______ the real interest rate. :

A. negative; increase; decrease

B. positive; decrease; increase

C. negative; decrease; decrease

D. positive; increase; increase

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer : The answer is option A.

If firms become pessimistic then firms will decrease investment. As result, production will decrease which will decrease the aggregate supply. This will shift the AS (Aggregate Supply) curve to leftward. Due to decrease in aggregate supply the quantity will decrease and inflation rate will increase. This will create a negative output gap. Now if interest rate decrease then the borrowing cost decrease. As a result, firms will invest more. This will increase the aggregate supply which will shift back the AS curve. As a result, the output gap will be zero and inflation rate will back to the original rate. Hence the Fed should decrease the interest rate. Therefore, option A is the correct answer.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
  3.   Suppose that consumers become pessimistic about the future health of the economy, and so cut back...
  3.   Suppose that consumers become pessimistic about the future health of the economy, and so cut back on their consumption spending. What will happen to aggregate demand and to output? What might the government have to do to keep output stable?             4.   Suppose the Federal Reserve, which is the central bank of the U.S., decided to lower the monetary policy interest rate. Use the macroeconomic model to analyze the possible effects of this event on Canada’s net capital outflow, net exports, and...
Assume firm A has high leverage, firm B has low leverage. Everything else about the firms...
Assume firm A has high leverage, firm B has low leverage. Everything else about the firms are the same. Both are highly profitable. Assume neither of the firms has any depreciation. Assume the only friction is tax. When corporate tax rate increases, what happens to the value of the two firms? A.Value of both firms will decrease by the same amount A B.Value of both firms will increase, the increase will be larger for firm A C.Value of both firms...
1. Holding everything else constant, the multiplier effect of a $100 tax cut : a)is the...
1. Holding everything else constant, the multiplier effect of a $100 tax cut : a)is the same as the multiplier effect of a $100 increase in G. b)is smaller than the multiplier effect of a $100 increase in G. c)is larger than the multiplier effect of a $100 increase in G. d)may be smaller than, larger than, or equal to the multiplier effect of a $100 increase in G. 2. When the government borrows funds in financial markets to pay...
7. Which of the following statements best explains the mechanism by which the economy will eventually...
7. Which of the following statements best explains the mechanism by which the economy will eventually return to long-run equilibrium after the decrease in transfer payments? Assume no other changes in government spending and taxation programs. A.  The reduction in the inflation rate due to the decrease in aggregate demand causes businesses to lower their expectations about the price level. This leads firms to produce more, shifting the short-run aggregate supply curve to the right, returning the economy to its natural...
The aggregate demand curve shows the relationship between the aggregate price level and: A) aggregate productivity....
The aggregate demand curve shows the relationship between the aggregate price level and: A) aggregate productivity. B) the aggregate unemployment rate. C) the aggregate quantity of output demanded by households, businesses, the government, and the rest of the world. D) the aggregate quantity of output demanded by businesses only. 2.When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This is known as the _____ effect and is a reason why...
The crowding out effect is zero if Select one: a. the LM-curve is vertical b. the...
The crowding out effect is zero if Select one: a. the LM-curve is vertical b. the central bank conducts open market sales following fiscal expansion c. income is stimulated via a tax cut rather than an increase in government spending d. the central bank conducts open market purchases following fiscal expansion e. the LM-curve is horizontal An asset (other than money) is considered to be more liquid if Select one: a. it can be quickly and cheaply transferred into money...
1. Which of the following accounts for a movement along a given AD curve? a. The...
1. Which of the following accounts for a movement along a given AD curve? a. The substitution effect b. The tax rate effect c. The real-balance effect d. The foreign aid effect e. The government spending effect 2. If the nominal interest rate is 6.3 percent and the inflation rate is 7.2 percent, then the real interest rate equals: a. - 13.5 percent b. + 13.5 percent c. - 0.9 percent d. - 7.2 percent e. + 1.1 percent 3....
21. The “prisoner’s dilemma” facing a cartel is that A) what is good for the cartel...
21. The “prisoner’s dilemma” facing a cartel is that A) what is good for the cartel is bad for society as a whole B) the production level that is best for a self-interested firm may not be what is best for the cartel as a whole C) what is good for the cartel as a whole is to maximize production; the dilemma is that individual cartel members may not want to share technology secrets with other firms D) the profit-maximizing...
provide 3-4 paragraphs post (team 2) 1-What are 4 key things you learned about the topic...
provide 3-4 paragraphs post (team 2) 1-What are 4 key things you learned about the topic from reading their paper? 2-How does the topic relate to you and your current or past job? 3-Critique the paper in terms of the organization and quality.1- Employee Stress and how it has an Adverse Effect on a Company This paper explores employee stress and how it has an adverse effect on a company, its employees and the organization. Job stress can have a...
Please read the article and answear about questions. Determining the Value of the Business After you...
Please read the article and answear about questions. Determining the Value of the Business After you have completed a thorough and exacting investigation, you need to analyze all the infor- mation you have gathered. This is the time to consult with your business, financial, and legal advis- ers to arrive at an estimate of the value of the business. Outside advisers are impartial and are more likely to see the bad things about the business than are you. You should...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT