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.
What will be an ideal response?
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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Refer to Table 9-11. Which country has an absolute advantage in producing clocks?
A) Denmark B) Belize C) both countries D) neither country
Creative destruction is:
A. the process by which large firms buy up small firms. B. the process by which new firms and new products replace existing dominant firms and products. C. a term coined many years ago by Adam Smith. D. applicable to planned economies but not to market economies.