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What is the best-case scenario for the Fed?

1. counter a positive real shock

2. counter a negative real shock

3. counter a negative AD shock

4. counter a positive SRAS shock

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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Related questions

2. Suppose instead, real GDP in the United States falls temporarily instead. Contrast the immediate effect of the temporary shock on interest rates and the exchange rate compared to the permanent shock.

a. (20 points) Draw two diagrams with the money market diagram for the US on the left and the expected return in $/ exchange rate ($/yen) diagram on the right. Label the impact effect, when the shock is temporary, as point B and the impact effect when the shock is permanent as point C.

b. (5 points) Why are these impact effects on the exchange rate different? Explain.

c. (5 points) Assuming again that the shock to real GDP in the US was temporary, what would happen to the nominal interest rate in the US and the exchange rate in the long-run. Explain.

3. Denmark pegs their currency, the krone, to the euro.

a. (10 points) Draw two diagrams, side by side with the money market diagram for Denmark on the left and the expected return in krone / exchange rate diagram on the right hand side. Label the initial equilibrium point A. Denmark suffers from an adverse productivity shock and goes in a recession. Show how your two diagrams are affected by the recession in Denmark. Assume that the peg is credible. b.

b) (10 points) Suppose Denmark prefers to fight the recession via counter-cyclical monetary policy by increasing the money supply in hopes of lowering interest rates in Denmark. Explain what would happen...i.e., would they be successful or not? Be sure to mention capital flows and use the term(s) 'capital flight' and/or 'hot money,' whichever applies. Make sure to use a balance sheet - T - account for Denmark's central bank and show/explain how the money supply changes endogenously.

Assume that initially economy is in the long-run equilibrium. For each of the following scenarios, say what will happen in the long run.

1. Because of a negative demand shock output in the short run is below original potential output. In the long run

A.) Equilibrium is achieved at a higher level of potential output.

B.) AD shifts to the left and brings economy back to original potential output.

C.) SRAS shifts to the left and brings economy back to original potential output.

D.) AD shifts to the right and brings economy back to original potential output.

E.) Equilibrium is achieved at a lower level of potential output.

F.) SRAS shifts to the right and brings economy back to original potential output. .


2. Because of a negative temporary supply shock current output is below original potential output. In the long run

A.) SRAS shifts to the right and brings economy back to original potential output.

B.) New long-run equilibrium is achieved at a higher level of potential output.

C.) AD shifts to the left and brings economy back to original potential output.

D.) AD shifts to the right and brings economy back to original potential output.

E.) New long-run equilibrium is achieved at a lower level of potential output.

F.) SRAS shifts to the left and brings economy back to original potential output. .

3. Because of a positive demand shock current output is above original potential output. In the long run

A.) AD shifts to the left and brings economy back to original potential output.

B.) New long-run equilibrium is achieved at a higher level of potential output.

C.) AD shifts to the right and brings economy back to original potential output.

D.) New long-run equilibrium is achieved at a lower level of potential output.

E.) SRAS shifts to the left and brings economy back to original potential output.

F.) New long-run equilibrium is achieved at a lower level of potential output. 


4. Because of a positive temporary supply shock current output is above original potential output. In the long run

A.) SRAS shifts to the right and brings economy back to original potential output.

B.) AD shifts to the left and brings economy back to original potential output.

C.) New long-run equilibrium is achieved at a lower level of potential output.

D.) AD shifts to the right and brings economy back to original potential output.

E.) SRAS shifts to the left and brings economy back to original potential output.

F.) New long-run equilibrium is achieved at a higher level of potential output. .


5. Because of a positive permanent supply shock current output is above original potential output. In the long run

A.) SRAS shifts to the right and brings economy back to original potential output.

B.) SRAS shifts to the left and brings economy back to original potential output.

C.) AD shifts to the right and brings economy back to original potential output.

D.) New long-run equilibrium is achieved at a lower level of potential output.

E.) New long-run equilibrium is achieved at a higher level of potential output.

F.) AD shifts to the left and brings economy back to original potential output. .

6. Because of a negative permanent supply shock current output is below original potential output. In the long run

A.) New long-run equilibrium is achieved at a lower level of potential output.

B.) SRAS shifts to the left and brings economy back to original potential output.

C.) SRAS shifts to the right and brings economy back to original potential output.

D.) AD shifts to the right and brings economy back to original potential output.

E.) AD shifts to the left and brings economy back to original potential output.

F.) New long-run equilibrium is achieved at a higher level of potential output.

1. Explain how the real balance effect works?

2. How will either the AD curve or SRAS curve shift as a result of each of the following changes:

A rise in the interest rate

An adverse supply shock

A rise in wealth

3. Explain what happens to U.S. net exports and U.S. aggregate demand as the dollar depreciates

4. Explain what happens to aggregate demand in each of the following cases: (a) The interest rate rises; (b) Wealth falls; (c) The dollar depreciates relative to foreign currencies; (d) Households expect lower prices in the future; (e) Business taxes rise.

5. Explain how expectations about future sales will affect investment.

6. Explain how each of the following can affect short-run aggregate supply: (a) An increase in wage rates; (b) A beneficial supply shock; (c) An increase in the productivity of labor; (d) A decrease in the price of a nonlabor resource (such as oil).

(a) An increase in SRAS that is greater than the increase in AD will lead to an increase in Real GDP and a fall in the price level.

(b) A decrease in AD that is greater than the increase in SRAS will lead to a fall in both the Real GDP and the price level.

(c) An increase in SRAS that is less than the increase in AD will lead to an increase in both the

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