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Author Question: Which of the following would be the source of a real business cycle? A) changes in technology B) ... (Read 32 times)

washai

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on: Jun 29, 2018
Which of the following would be the source of a real business cycle?
 
  A) changes in technology B) anticipated expansionary monetary policy
  C) unanticipated contractionary monetary policy D) unanticipated expansionary monetary policy

Question 2

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium.
 
  For Year 2, graph aggregate demand, long-run aggregate supply, and short-run aggregate supply such that the condition of the economy will induce the Federal Reserve to conduct a contractionary monetary policy. Briefly explain the condition of the economy and what the Federal Reserve is attempting to do.


rleezy04

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Reply #1 on: Jun 29, 2018
Answer to Question 1

A

Answer to Question 2

The Federal Reserve conducts a contractionary monetary policy to reduce inflation. In the graph below, the economy would move from point A in Year 1 to point B in Year 2 without any contractionary monetary policy. At point B, inflation is higher than it would be if real GDP equaled potential real GDP. The Fed would decrease the money supply and raise interest rates to slow down aggregate demand, trying to keep the economy at potential.


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