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Unformatted text preview: P Y AS AS AD AD P Y AS AS AD AD P Y AS AD AD Assignment 4 Solutions 1. Cost-push inflation is caused by an increase in the cost of some goods and services in the economy (e.g. a large increase in the price of oil in the 1970s). This causes the AS curve to shift left. Expanding the money supply causes the following: Ms (up) r (down) I (up) Y (up) AD (shifts right) P (up) Thus, expanding the money supply further increases inflation. 2. Decreasing the money supply causes the following: Ms (down) r (up) I (down) Y (down) AD (shifts left) P (down) & unemployment (up) Thus, decreasing the money supply would reduce inflation, but it would also increase unemployment. 3. For a bank, a loan is an asset. Foreclosures occur when an individual defaults on his/her loan, thus the value of the loan asset is decreased. Banks balance assets against liabilities. They depend on the loans as a future stream of income with which they can pay off their liabilities...
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This note was uploaded on 04/30/2008 for the course AIM 2301 taught by Professor Muslu during the Spring '08 term at University of Texas at Dallas, Richardson.
- Spring '08