Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 24.1, Problem 1QQ
To determine
Liquidity preference theory, interest rate, and aggregate
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Suppose a wave of negative “ animal spirits” overruns the economy, and people become pessimistic about the future.What happens to aggregate demand? If the Fed wants to stabilize aggregate demand, how should it alter the money supply? If it does this, what happens to the interest rate? Why might the Fed choose not to respond in this way?
Explain the relationship between the effectiveness of monetary policy and the interest elasticity of investment. Will the monetary policy be more or less effective the higher the interest elasticity of investment demand?
Suppose the Fed decides to implement expansionary monetary policy. This will likely result in a _____ in the money supply and a _____ in interest rates.
increase or decrease?
Chapter 24 Solutions
Essentials of Economics (MindTap Course List)
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- When a central bank has driven down short-term nominal interest rates to nearly zero, the monetary policy can do nothing more to stimulate the economy. True or false? Explain.arrow_forwardThe central bank decided to raise interest rates when it wanted to reduce aggregate demand to fight inflation. How does an increase in interest rates reduce aggregate demand?arrow_forwardHow does aggregate demand affect inflation? How do interest rates affect aggregate demand?arrow_forward
- If the Federal Reserve wants to keep aggregate demand (i.e. spending growth) stable, what will it do to the growth rate of money supply when a lot of good news comes out about the economy increase it, decrease it, or leave it unchanged? Explain your answer.arrow_forwardAn increase in the interest rate discourages private firms from making new investments in factories. How does the sensitivity of investment to changes in the interest rate affect the amount by which monetary policy influences aggregate-demand?arrow_forwardExplain the relationship between the effectiveness of monetary policy and the interest elasticity of money demand. Will the monetary policy be more or less effective the higher the interest elasticity of money demand? Explain.arrow_forward
- Critically analyze what facts determine the impact of an interest rate change? How effective is monetary policy?arrow_forwardExplain how the central banks are able to reduce the level of aggregate demand in an economy by changing the reserve requirements of commercial banks?arrow_forwardSuppose that the government decides to increase government expenditure. a) Is this a fiscal or a monetary policy? b) Is this an expansionary or a contractionary policy? c) How will the equilibrium output and interest rate change in goods and money markets, respectively. Explain using the diagrams.arrow_forward
- Hello, I would like help with this assignment. I sent the other day and the number one and two were solved, and I was told to send the rest. Thank you Monetary Policy If the economy is at full employment level of output where Y=Y*, demonstrate the state of the economy graphically and explain. If the monetary authority anticipates that growth will increase in the next 6-12 months, assume the Federal Reserve was correct, and Aggregate Demand increases. Demonstrate this on your graph, label this part b. What policy should they implement? What choices or options do they have to implement this policy? Demonstrate and explain the effects of this policy and explain fully. If the US government thought the economy was in a recessionary state, how would this policy response impact the monetary policy from part b and c. Explain fully.arrow_forwardIf the Federal Reserve wanted use an open market operation to combat a recession, what would they do, and what would its effect be? The Federal Reserve expands the money supply by 5%. Draw an aggregate supply/aggregate demand diagram to show the short run effect of this scenario. What happens to price and output? Which curve shifts? Which component of that curve accounts for the shift?arrow_forward
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