Meanwhile part of the extra income transferred to

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Meanwhile, part of the extra income transferred to households by the tax rebates is saved (even if households aren’t worried about higher taxes in the future) and part of it is spent on imports (the part saved may be large if the rebates are viewed as a one-time windfall). Thus, the initial positive boost to employment and AD from increased C associated with the tax rebates would be somewhat less—and possibly quite a bit less-- than the initial loss in employment and AD from decreased G. The multiplier effects work in the same way on the shock to AD in either case; but, since the initial shock is larger for a $1 billion decrease in G than for a $1 billion increase in disposable income, overall AD and employment decline.
7) The Federal Reserve open market committee which meets once every 6-8 weeks to discuss monetary policy met on June 16-17 this week. Investors around the world are searching for clues about how soon and how fast the Fed will raise interest rates. In the FOMC report and Janet Yellen press conference following the meeting what Aggregate Demand and Aggregate Supply circumstances influenced the Fed’s guidance on the timing of future interest rate increases.? (Note: the Fed does not use the words Aggregate demand and aggregate supply in its communications, but the underlying concepts very much inform their policy decisions). 6pts
In terms of AD, the Fed is counting on the household sector to increase spending on Consumer goods as employment continues to improve and household confidence in the economic future increases. Also the Fed noted signs that housing construction may be starting to increase. Export growth will continue to be constrained by the high value of the $, but the Fed does not expect the $ to strengthen further beyond current levels. The Fed also noted that business fixed investment was not as consistently strong as hoped thus far this year, but hopes that accommodative credit conditions and signs of strength in household spending may increase business spending on capital goods. In terms of AS, the Fed expects that the declines in oil prices and prices of other imports that have helped hold back any upward shifts in AS will level out and that continued employment growth will start to increase wages as the economy nears full employment. Thus the Fed expects inflation rates to move up towards its target of 2% over the year of 2016 and beyond.. (Most of you discussed this very well with you intuition derived from you reading the article. I took it easy on this Q.)

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