Explain the linkages in the causal chain when the Fed conducts a contractionary monetary policy. What will be the ultimate effect on GDP?
What will be an ideal response?
Contractionary monetary policy will require the Fed to either sell government securities, raise the required reserve ratio, or increase the discount rate. This will cause the money supply schedule to shift inward and raise the equilibrium level of the interest rate. This, in turn, will cause a decrease in the investment component of total expenditures and shift the total expenditure schedule downward. This will reduce the equilibrium level of real GDP. Also, contractionary monetary policy will cause the aggregate demand curve to shift inward and cause a reduction in the equilibrium price level. In the end, a contractionary monetary policy will lead to a lower equilibrium price level and a lower level of equilibrium real GDP.
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Pareto's Principle states that:
a. 20 percent of the time expended produces 80 percent of the results b. 90 percent of the time spent produces 10 percent of the results c. 75 percent of time is wasted d. A task or job fills the time available
If expected inflation is constant, then when the nominal interest rate increases, the real interest rate
a. increases by more than the change in the nominal interest rate. b. increases by the change in the nominal interest rate. c. decreases by the change in the nominal interest rate. d. decreases by more than the change in the nominal interest rate.
The Golden Rule is an example of a private solution for
a. subsidizing higher education. b. internalizing externalities. c. increasing production. d. reducing scarcity.
Due to a firm generating external costs, the government decides to ________ the firm. When this happens, the firm will produce ________ units of output than before the tax was imposed in order to continue maximizing profits.
A. tax; fewer B. subsidize; fewer C. subsidize; more D. tax; more