Question 2. AD-AS Analysis with an Alternative Policy Rule. This question will have you derive a version of the aggregate demand curve under alternative assumptions about how the Fed conducts policy. Assume that the IS curve assumes the usual form: Y = C-mpc x T +Ī+Ģ 1 mpc 1 d mpc xr, where Y is output, r is the real interest rate, and the remaining parameters utilize the same notion that we used in class. Suppose that the Fed's actions are summarized by the following monetary policy curve: r=r+ax (Y – YP) + λ × π,
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- Occasionally, the Federal Open Market Committee (FOMC)sets a policy designed to “track” the interest rate. This meansthat the FOMC is pursuing policies designed to keep the interestrate constant. If, in fact, the Fed were acting to counter anyincreases or decreases in the interest rate to keep it constant,what specific actions would you expect to see the Fed take if thefollowing were to occur? (In answering, indicate the effects ofeach set of events on Y, C, S, I, Ms, Md, and r.)a. An unexpected increase in investor confidence leads to asharp increase in orders for new plants and equipment.b. A major New York bank fails, causing a number of worried peo-ple (not trusting even the FDIC) to withdraw a substantialamount of cash from other banks and put it in their cookie jarsWhich monetary policy tool can the Federal Reserve use to conduct an expansionary monetarypolicy (please state at least one instrument)? Which monetary policy instrument can the Fed useto conduct a restrictive monetary policy? Assume the country is experiencing highunemployment and a recession, such as during 2001, 2008-2009, and 2020. What is the Fedlikely to do in this scenario? Discuss the effects of such policy on the economy. Can you givea specific example to what the Fed did during any of those recessions? This is not a writing, it is economic.1. Which of the following is concerned with changing the aggregate demand of thenation?A) External balanceB) Internal balanceC) Expenditure-changing policiesD) Expenditure-switching policiesAnswer: 2. Which of the following is an example of an expansionary monetary policy?A) Increase in TaxesB) Increase in the nation's money supplyC)Increased government expendituresD) Reduction in taxesAnswer:
- During the global financial crisis, how was the Fed ableto help offset the sharp increase in financial frictionswithout the option of lowering interest rates further?Did the Fed’s plan work?Assume we combine contractionary fiscal policy with expansionary monetary policy. The result is of this policy mix is O higher interest rates and lower output O higher interest rates and an indeterminate level of output O lower interest rates and an indeterminate level of output lower interest rates and higher outputWhich of the following statements is true for the scenario illustrated in the below diagram? LRAS Price Level (base year = 100) 120 110 100 90 80 400 SRAS E₁ 700 Eo AD AD₁ 500 600 Real Output (constant dollars) 800 O it illustrates a recessionary gap at Eo Oit illustrates expansionary monetary policy by shifting ADO to AD1 O it illustrates procyclical monetary policy O it can be caused by a tightening of the money supply, also known as contractionary monetary policy
- Explain the uniquechallenges that monetary policymakersface at the zero lowerbound, and illustratehow nonconventionalmonetary policy canbe effective undersuch conditions.Explain why it is not possible for growing economies to have price stability whenthe money supply is constantNEED MODEL DRAWN PLEASE Draw an IS-LM model in general equilibrium. Show the effect of expansionary monetary policy in the short run, and then explain what adjustmentwill happen in a classical version of the model. Did this policy accomplishanything with regards to GDP growth
- . Find the level of income Y and the rate of interest i that simultaneously bring equilibrium to the economy and estimate the level of consumption C, investment I, the speculative demand for money Mw, and the 34% · Locatio transaction-precautionary demand for money Mt when (a) the money supply Ms = 1000, C = 950 + 0.75Y, I = 310 - 125i, Mw = 264 - 175i, and Mt, = 0.15Y, and (b) Mg = 800, C = 1200 + 0.6Y, I = 227 – 180i, Mw = 127 – 180i, and Mt = 0.2Y. nswers to Sunnlementary,Suppose the monetary policy curve is given byr = 1.5 + 0.75p, and the IS curve is given byY = 13 - r.a. Calculate an expression for the aggregate demandcurve.b. Calculate the real interest rate and aggregate outputwhen the inflation rate is 2%, 3%, and 4%.c. Draw graphs of the IS, MP, and AD curves, labelingthe points from part (b) on the appropriate graphs.If a central bank wants to make sure that its policy actions are successful in manipulating interest rates to stabilize an economy around its full-employment level, it should Multiple Choice O be prepared to make modest and frequent adjustments after receiving feedback on how its actions affect the economy never announce its intentions, because financial markets will always overreact frequently change its policies to keep financial markets guessing O react to a high rate of Inflation but not to an economic boom focus on Inflation and output gap equally