The Influence of Monetary and Fiscal Policy on Aggregate Demand 10

The Influence of Monetary and Fiscal Policy on Aggregate Demand 10

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Unformatted text preview: 11 . Problems and Applications Q5 The following graph shows the long—run aggregate—supplyr curve (LRAS), the short—run aggregate—supplyr curve (AS), and the aggregate—demand curve for h El |"I econ OI'TIY. ('2) Correct Answer Your Answer _0_ Aggregate Supply Aggregate Demand _|:|_ Aggregate Supply Price Level Qua nijty ofOum ut K Points: _ 0.5,."1 b The economy is in arecession if with high if unemployment and low if output. fiPoints:—1l1 Explanation: Close Explanation A The current state of the economy is given by the intersection of the short—run aggregate—supply curve and the aggregate—demand curve (ADI). This intersection occurs at a level of output that is lower than the level given by the long—run aggregate—supply curve; therefore, the economy is in reoesmbn, with high unemployment and low output. To return the economy to the natural rate of output, the Fed could buy 1/ government bonds. fiPoints:—1l1 Illustrate the eflfiect of this open—market operation on the following graph. Show the resulting change in the interest rate. 1 —0— Money Demand _|:|_ Money SUD”! ---------+ Interest Rate Qlanfity of Money 011 the Mna! graph, show the efl‘ed' ofthe open—market operahbn on output and the price level ...
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