ECON 0280 Problem Set 10

ECON 0280 Problem Set 10 - policy can be used to return the...

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ECON 0280: Introduction to Money and Banking Problem Set 10 1. Using the quantity theory approach to aggregate demand, graph the aggregate demand curve if the money supply is $400 billion and veloc- ity is 5. What happens to the the position of the aggregate demand curve if the money supply falls to $50 billion? Within the classical model, what effect will this monetary contraction have on output and prices? 2. Using the Keynesian theory, show how aggregate demand and supply analysis can explain why both aggregate output and the price level fell sharply when investment spending collapsed during the Great Depres- sion. 3. Continuing from the previous question, explain how the economy will return to the natural rate of output in the long run. According to Keynesians, does this process occur rapidly? 4. Continuing from the previous two questions, explain how discretionary
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Unformatted text preview: policy can be used to return the economy to the natural rate of output. Are Keynesians in favour of such policies? Explain why or why not. 5. According to monetarists, what causes business cycles and inflation? Using the monetarist model, explain why a policy rule for controlling the money supply will both stabilise short-run business cycles and ensure long-run price stability. 6. Suppose that a treaty is signed limiting armies throughout the world. The result of the treaty is that the public expects military and hence 1 government spending to be reduced. If the new classical view of the economy is correct and government spending does affect the aggregate demand curve, predict what will happen to aggregate output and the price level when government spending is reduced in the line with the public’s expectations. 2...
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This note was uploaded on 07/02/2009 for the course ECON 0280 taught by Professor Jamesmaloy during the Summer '09 term at Pittsburgh.

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ECON 0280 Problem Set 10 - policy can be used to return the...

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