Author Question: If the Fed orders a contractionary monetary policy, describe what will happen to the following ... (Read 70 times)

anshika · **on:** Jun 29, 2018

If the Fed orders a contractionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy:

a. The money supply
b. Interest rates
c. Investment
d. Consumption
e. Net Exports
f. The aggregate demand curve
g. Real GDP
h. The price level

Question 2

Comment on the following statement. Taxing externality-producing activities may not eliminate damages.

What will be an ideal response?

verrinzo · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

a. The money supply decreases
b. Interest rates rise
c. Investment decreases
d. Consumption decreases
e. Net exports decrease
f. The aggregate demand curve shifts to the left
g. Real GDP falls
h. The price level falls

Answer to Question 2

Taxes on these activities are not designed to eliminate externalities; they are simply meant to force decision makers to consider the full costs of their decisions. Even if we assume that a tax correctly measures all the damage done, the decision maker may find it advantageous to continue causing the damage.