In the figures accompanying each question illustrate

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Intermediate Financial Management
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Chapter 23 / Exercise 23-4
Intermediate Financial Management
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In the figures accompanying each question, illustrate the short-run effects for each monetary and fiscal policy combination using the money market, the loanable funds market, and aggregate supply/aggregate demand (AS/AD) graph. Circle the up or down arrow (or ? for uncertain), and explain the effect of the policies on real gross domestic product (GDP), the price level, unemployment, interest rates, and investment.1. The unemployment rate is 10 percent, and the inflation rate is 2 percent. The federal government cuts personal income taxes and increases its spending. The Federal Reserve (the Fed) buys bonds on the open market.Figure 5-5.1Expansionary Monetary and Fiscal Policy(A) Real GDPExplain.(B) The price levelExplain.(C) UnemploymentExplain.REAL GDPPRICE LEVELQUANTITY OF MONEYINTEREST RATEQUANTITY OFLOANABLE FUNDSINTEREST RATE(D) Interest ratesExplain.(E) InvestmentExplain.ACTIVITY 5-5CEE-APE_MACROSE-12-0101-MASM-Book.indb 17727/07/12 10:46 PM
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Intermediate Financial Management
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Chapter 23 / Exercise 23-4
Intermediate Financial Management
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178 Advanced Placement Economics Macroeconomics: Student Resource Manual © Council for Economic Education, New York, N.Y..5Macroeconomics2. The unemployment rate is 6 percent, and the inflation rate is 9 percent. The federal government raises personal income taxes and cuts spending. The Fed sells bonds on the open market.Figure 5-5.2Contractionary Monetary and Fiscal Policy(A) Real GDPExplain.(B) The price levelExplain.(C) UnemploymentExplain.PRICE LEVELINTEREST RATEINTEREST RATE(D) Interest ratesExplain.(E) InvestmentExplain.REAL GDPQUANTITY OF MONEYQUANTITY OFLOANABLE FUNDSACTIVITY 5-5 (CONTINUED)CEE-APE_MACROSE-12-0101-MASM-Book.indb 17827/07/12 10:46 PM
Advanced Placement Economics Macroeconomics: Student Resource Manual © Council for Economic Education, New York, N.Y. 1795Macroeconomics3. The unemployment rate is 6 percent, and the inflation rate is 5 percent. The federal government cuts personal income taxes and maintains current spending. The Fed sells bonds on the open market.Figure 5-5.3Contractionary Monetary Policy and Expansionary Fiscal Policy(A) Real GDPExplain.(B) The price levelExplain.(C) UnemploymentExplain.PRICE LEVELINTEREST RATEINTEREST RATE(D) Interest ratesExplain.(E) InvestmentExplain.REAL GDPQUANTITY OF MONEYQUANTITY OFLOANABLE FUNDSACTIVITY 5-5 (CONTINUED)CEE-APE_MACROSE-12-0101-MASM-Book.indb 17927/07/12 10:46 PM
Advanced Placement Economics Macroeconomics: Student Resource Manual © Council for Economic Education, New York, N.Y. 1815Macroeconomics

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