List and briefly explain the steps in how monetary policy affects real GDP in the AS/AD model using as your example the case when the Fed eases monetary policy to fight a recession
What will be an ideal response?
There are several steps. Step one is a change in the federal funds rate. To fight a recession, the Fed lowers the federal funds rate. It does so by using open market operations to increase banks' reserves. With the increase in reserves, the quantity of money and bank loans increase. The increase in loans increases the supply of loanable funds, which then lowers the real interest rate. Next the fall in the real interest rate increases investment, net exports (though a fall in the exchange rate), and other interest sensitive parts of aggregate demand and thereby increases aggregate demand. Aggregate demand increases with a multiplied effect. The increase in aggregate demand raises the price level and increases real GDP.
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Stock prices are
A) based less on the current profitability of firms than on their expected future profitability. B) based equally on the current profitability of firms and on their expected future profitability. C) not based on the current profitability of firms or on their expected future profitability. D) based more on the current profitability of firms than on their expected future profitability.
A Giffen good has
A) a positive substitution effect. B) a negative income effect. C) a larger income effect than substitution effect. D) All of the above.
Comparative advantage identifies the good for which the producer’s absolute advantage is relatively larger, or where the producer’s absolute _____________ disadvantage is relatively smaller.
a. competitive b. profit c. productivity d. trade
The GDP deflator is designed to adjust nominal GDP
a. for changes in the unemployment rate. b. for changes in prices. c. for problems that arise because of externalities. d. for changes in interest rates.