b What happens to prices and output in the long run if the economy is allowed

B what happens to prices and output in the long run

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(b) What happens to prices and output in the long run if the economy is allowed to a just to long-run equilibrium on its own? (c) If policymakers had intervened to move output back to the natural rate instead of allowing the economy to self-correct, in which direction should they have moved aggre- gate demand? 11. Fiscal and Monetary Policy in the Aggregate Demand and Aggregate Supply Framework. Suppose the economy is in a deep recession. (a) Identify fiscal policy actions that government might initiate to stabilize the economy. What fiscal policy instrument would you recommend as the most effective? Why? (b) Assume that the policy you identified in part (a) was rather effective, but the economy is still operating below full employment. Using a correctly labeled aggregate demand-ag- gregate supply graph, show and explain how the action you identified would affect each of the following: (i) Real output; (ii) Price level; (iii) Short-term interest rates; (iv) Investment. 47
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(c)Given that the economy is still below full employment, identify the policy the CentralBank could implement to increase the money supply. What monetary policy instrument isthe most frequently used in the industrialized countries? (d) Using correctly labeled graphs, show and explain how the increase in money supply will affect each of the following in the short run: (i) Short-term interest rates; (ii) Composition of aggregate expenditures; (iii) Real output; (iv) Price level. (e) Identify fiscal policy and monetary policy actions that can promote long-run eco-nomic growth. 12. Comparative Effectiveness of Monetary and Fiscal Policy In Country X investment is only slightly responsive to changes in the real interest rate, while money demand is quite responsive to changes in the real interest rate. In Country Y investment is very responsive to changes in the real interest rate, while money de- mand is only slightly responsive to changes in the real interest rate. (a) Explain the short-run effect of a 5 percent increase in the money supply on each of the following in each country: (i) Real interest rate; (ii)Output; (iii) Price level. (b) Using a single graph, draw a curve showing the relationship between the real inter- est rate and the demand for money for each of the following: (i) Country X; (ii)Country Y. (c) Using a single graph, draw a curve showing the relationship between real interest rate and demand for investment for each of the following: (i) Country X; (ii)Country Y. (d) Based on your answers to parts (a) through (c), in which country will the change in the real interest rate be greater? Explain why. (e) Based on your answers to parts (a) through (c), in which country will the change in output be greater? Explain why. (f) In which of these countries do conditions more closely reflect the monetarists' view of the economy?
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