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MonetaryPolicyGroupExerciseSolutions

MonetaryPolicyGroupExerciseSolutions - Monetary Policy...

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Monetary Policy Responses to Economic Disturbances Guidelines: For each disturbance noted below, assume the U.S. economy is currently operating at its desired targets for real GDP and the price level. Use the aggregate supply-aggregate demand model to answer questions 1-3. 1. Indicate how each disturbance below will influence the U.S. economy in terms of real GDP and the price level (i.e. output growth and inflation), and explain why it will have this effect. 2. Determine the appropriate monetary policy action needed to return the U.S. economy to its desired target levels for real GDP and the price level. 3. Be able to explain how the policy action you chose will remedy the problem (i.e. return the U.S. economy to its desired real GDP and price level targets). Economic disturbances: 1. Last Name (A – D): A significant reduction in income tax rates (e.g., the Bush income tax cuts). 2. Last Name (E – K): A significant increase in government spending (e.g., spending on the military conflict in Iraq). 3. Last Name (L – R): A significant increase in foreign income (e.g., rapid growth in China and India, along with a quickly recovering economy in Japan).
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