Unit 4 Long Free Response Macroeconomics – Flashcards
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How does the Federal Government undergo an expansionary policy?
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The Federal Reserve could be buying bonds in the open market. They're all a sign that the economy needs to be stimulated and is entering a recession
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The government issues an expansionary monetary policy. What happens to interest rates Short run
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They reduce, more money is available for loans and the price of this money drop
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The government issues an expansionary monetary policy. What happens to private investments
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Lower interest rates mean investment and consumption increase
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The government issues an expansionary monetary policy. What would happen to GDP
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An increase on consumption and investment are an increase in Agregate demand. So GDP shifts rght.
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The government issues an expansionary monetary policy. What happens to employment
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As result of the increase in AD and GDP, employment will also rise to produce a larger output.
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How does a contractionary policy look? ( using an AS AD graph)
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Show AD and SRAS and LRAS. Label Real GDP on bottom and Price Level on Y axis. Make sure equilibrium is shifted to the right.
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Would Monetary Policy increase or decrease the money supply for a contractionary policy?
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The policy would reduce the money supply. By reducing the money supply interest rates.
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How would a contractionary policy affect interest rates?
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they'd sell bonds to the open market and cause interst rates to rise because of the money supply decreasing
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How would a contractionary policy affect investment?
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As interest rates rise, investment looks less profitable and thus declines
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How would a contractionary policy affect output?
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A decrease in investment leads to a decrease in AD. If the economy is on the upward-sloping portion of SRAS, output will decrease with the leftward shift of AD
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How would a contractionary policy affect price level?
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The goal of the policy is to lower the price level. On the upward - sloping SRAS, the price level will fall with less spending
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How would a contractionary policy affect employment?
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If on the upward - sloping SRAS, employment will decline with the decline of in output.
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How would a Federal expansionary monetary policy assist in reducing unemployment rate? (Short Term)
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The AD curve shifts to the right and the SRAS drops back. Interest rates will lead to an increase in investment, so the output would cause the price level and employment to increase. Nominal and real interest rates would drop as well.
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How would a Federal expansionary monetary policy assist in reducing unemployment rate? (LongTerm)
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In the long run, in response to the higher price level, workers will demand higher nominal wages. The higher nominal wages will increase the cost of production at every level of output, thus shifting the short-run aggregate supply curve to the left — shown in the graph above as SRAS1 . The higher costs of production resulting in higher prices will reduce the output demanded and, hence, reduce the level of employment. Over time, based on the Fisher Effect, the nominal interest rate will increase and equal the real rate of interest plus the inflation rate. The real interest rate will initially decrease and then return to its long-run equilibrium level.
