Describe the effects of an oil price shock in a Keynesian model; why are such supply shocks difficult to handle using macroeconomic stabilization policies?
What will be an ideal response?
The FE line shifts left, the LM curve even more so, so the economy enters a recession. The price level rises immediately, the real interest rate rises, and output declines. Macroeconomic stabilization policy can't restore output to its previous level, for the attempt to do so will cause inflation. Even restoring the economy to its (lower) full-employment level of output is difficult without risking even higher inflation.
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In an open economy including the government, planned expenditures equals
A) C + I + G + X + M. B) C + I + G. C) C + I + G - X + M. D) C + I + G + X - M.
Suppose the desired reserve ratio is 10 percent. If Urban Bank has total deposits of $1,000 and total assets of $10,000, the amount of desired reserves is
A) $100. B) $900. C) $1,000. D) $9,000. E) $1,100.