ECON 214 Problem Set 11 solutions complete answers

ECON 214 Problem Set 11 solutions complete answers 

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Question 1

 

The curves shown depict an economy with a real GDP of $16 billion. Use the drag tool to model an unusually long and deep recession that does lasting damage to the economy, decreasing its real GDP to $14 billion for the foreseeable future. Keep the price level the same.

 

Question 2

 

The graph shows the effects of an expansionary monetary policy, which, over time, results in shifts of both the aggregate demand curve (AD1 to AD2) and the short-run aggregate supply curve (SRAS1 to SRAS2).

 

If the dot indicates the economy's initial equilibrium state, place a second dot to show the economy's new equilibrium in the short run, given that the monetary policy move was completely expected.

 

Question 3

 

Through bond sales, a nation's central bank pulls money out of circulation. One of the short-term effects is to drive the price level from 100 down to 93.7. There are other short-term effects as well, but they fade in the long run, even as the price level drops still further.

 

Model the short- and long-term effects in the graph below by dragging one or more curves to new positions.

 

Question 4

 

A nation's central bank auctions off a new issue of 10-year bonds. What is the short-run effect on the nation's economy? Indicate your answer by dragging one of the curves in the graph below to a new position.

 

Question 5

 

The Fed has decided to expand the money supply, leading to lower interest rates. As a small business owner, you react to these lower interest rates by deciding to expand your operations and open up a new branch of your pet grooming business. What impacts would this decision have on the macroeconomy?

 

Question 6

 

If the government wanted the economy to expand, would the Federal Reserve (the Fed) buy or sell bonds?  

 

Question 7

 

Consider an economy operating at point A in the figure below. The unemployment rate, the inflation rate, and the expected inflation rate are 5%. Suppose the central bank believes the inflation rate is too high, and it undertakes a policy that decreases the inflation rate to 0%. In the questions below, you are asked to trace the effects of the central bank policy in the short run and the long run. There are five questions that build on one another, so go slowly.

 

To reduce the inflation rate, the Fed would want to pursue        policy.

 

The central bank changes the money supply using open market operations. The central bank would        bonds in the loanable funds market.

 

This action by the central bank will cause

 

The change in interest rates will cause the economy to contract, and the economy moves from        in the short run.

 

Over time, people adjust their expectations of inflation. Once workers and firms come to expect 0% inflation, the economy moves from

 

Question 8

 

The graph below shows a short-run Philips curve with an expected inflation rate of 6% (marked by the point on the graph). Drag the curve in the correct direction to show what would occur if the expected inflation rate became lower than 6%.

 

Question 9

 

Which of the following describes the expected outcome of expansionary monetary policy in the short run?

 

Question 10

 

What would happen in the market for loanable funds if the Federal Reserve sells bonds? Shift the appropriate curve in the correct direction.

 

Question 11

 

Which of the following statements was not correct as of 2019?

 

Question 12

 

What effects should quantitative easing have on the short-run Phillips curve?

 

Question 13

 

Consider the actions of the Fed in response to the Great Recession. Which of the following scenarios should the Fed be worried about if its objective is increasing aggregate demand?

 

Question 14

 

Suppose that people’s expectations in 2013 are rational. If the Federal Reserve engages in a fourth round of quantitative easing, then the inflation rate will        and the unemployment rate will        in the short run.

 

These changes occur as a result of the aggregate demand curve        and the aggregate supply curve       .

 

Question 15

 

In each of the following situations, are you helped or harmed by inflation?

 

Question 16

 

Which of the following variables will not be affected by monetary policy in the long run?

 

Question 17

 

If you were on the Federal Reserve Board and you were concerned only with reducing high unemployment, you would implement        monetary policy with a        focus.

 

Question 18

 

Monetary policy is limited in its impact when

 

Question 19

 

You are studying abroad in Australia for a semester. Unemployment has been creeping up and currently stands at 6%. This rate is getting a little too high for comfort, so the central bank of Australia decides to do something about it. When you arrived in the country, inflation was hovering around 3% and had been at that level for a few years. The central bank’s action leads inflation to increase to 5%.

 

A. What happens to unemployment in the short run if inflation is expected to be 0%? 

 

B. What happens to unemployment in the short run if citizens of Australia have adaptive expectations?

 

C. What happens to unemployment in the short run if citizens of Australia have rational expectations?

 

Question 20

 

With adaptive expectations, what is the inevitable consequence of an unexpected, active, expansionary monetary policy in the short and long run?