Assume the economy is initially in a long-term equilibrium.
Suppose Congress and the president
decide to reduce the budget deficit by making 10 percent across-the-board cuts to every
government program tomorrow (and for the record, 10 percent is a very big number in this
Use the AD/AS model to describe the effect this policy will have on inflation and real
GDP in the short run and the long run.
For a number of years, the federal funds rate has been at or very near zero.
circumstances would it behoove any central bank to offer a negative interest rate? Briefly explain
in no more than half a page
Suppose a central bank has increased its nation's nominal money supply considerably for several
years in a row, but without any increase in inflation.
Over the same time, suppose its economy
has not grown.
Given this information, explain why this monetary policy has not yielded any
Use the aggregate demand/aggregate supply (AD/AS) model to aid in your answer, and
assume the economy is in a long-term equilibrium as your starting point.
A good approach would
be to compare what is supposed to happen to AD when the Fed conducts expansionary
monetary policy to this situation.