Macroeconomics. Please help !!! Thank you

10 . Use of discretionary policy to stabilize the economy Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy, and the pros and cons of using these tools to combat economic fluctuations. The following graph shows a hypothetical aggregate demand curve (AD), short-run aggregate supply curve (AS), and long-run aggregate supply curve (LRAS) for the U.S. economy in April 2023. Suppose the government decides to intervene to bring the economy back to the natural level of output by using 1 policy. Depending on which curve is affected by the government policy, shift either the AS curve or the AD curve to reflect the change that would successfully restore the natural level of output. (?) 1. a) an expansionary b) a contractionary 2. a) lags b) inflation c) consumer preferences 150 O 3. a) leave the U.S. economy uncharged AS AD b) fall short of the natural level of output 130 c) push the economy beyond natural level of output d) increase the long-run production capacity 110 AS PRICE LEVEL 90 AD 70 LRAS 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) Suppose that in April the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output in the preceding scenario. In June 2023, U.S. imports decrease because the United States has implemented trade restrictions on French goods. Because of the 2 7 associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely once the effects of the policy are fully realized.1 . Key facts about economic fluctuations The following graph approximates business cycles in the United States from the first quarter of 1955 to the third quarter of 1959. The vertical blue bar coincides with periods of 6 or more months of declining real gross domestic product (real GDP). (?) 2800 2700 REAL GDP (Billions of dollars) 2600 2500 2400 1955 1956 1957 1958 1959 YEAR Source: "Current-dollar and Real GDP," Bureau of Economics Analysis, last modified May 1, 13, accessed May 15, 13, http://www.bea.govational/xls/gdplev.xls. 1. a) a recession b) an expansion c) a business cycle Notice that real GDP trends upward over time but experiences ups and downs in the short run. A period of declining real GDP, such as the blue-shaded period in 1957, is known as 1.True or False: Small ups and downs in real GDP follow a consistent, predictable pattern. O True O False Which of the following probably occurred as the U.S. economy experienced declining real GDP in 1957? Check all that apply. Retail sales declined. Consumer spending declined. Industrial production increased. O The unemployment rate increased.2 . Explaining shortrun economic uctuations Most economists believe that real economic variables and nominal economic variables behave independently of each other in the long n.|n. For example, an increase in the money supply, a 1. V variable, will cause the price level, a 2- V variable, to increase but will have no longrun effect on the quantity of goods and services the economy can produce, a 3_ V variable. The distinction between real variables: Ill. and nominal valiables is known as v In the short run, however, most economists believe that real and nominal variables are intertwined. Economists use the model of aggregate demand and aggregate supplyr to examine the economy's short-an Fluctuations around the long-mn output level. The following graph shows an incomplete shortrun aggregate demand (AD) and aggregate supply {AS} diagramit needs appropliate labels for the axes and curves. You will idenfy some of the missing labels in the questions that follow. 1. , 2. , 3. a] nominal b} real 1|. a} the classical dichotomy b} the quantity theory c} price neutrality A5 5. a} price level b} quantity of output c} supply 9 d} demand 3-: at g 6. a} demand bisupplv E g - I HORIZONTM. AXIS The veriical axis of the aggregate demand and aggregate supply model measures the overall 5- V . The aggregate 5. V curve shows the quantity of output that households, rms, Hie government, and foreign customers want to bug.r at each price level. 3 . Determinants of aggregate demand The following graph shows a decrease in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the left from ADi to AD2, causing the quantity of output demanded to fall at all price levels. For example, at a price level of 140, output is now $200 billion, where previously it was $300 billion. (? ) 170 150 140 + 130 PRICE LEVEL 120 110 AD 100 AD 2 100 200 300 400 500 600 700 800 OUTPUT (Billions of dollars) 1. , 2. , 3. a) decrease b) increase The following table lists several determinants of aggregate demand. 4. a) depreciate b) appreciate Complete the table by indicating the change in each determinant necessary to decrease aggregate demand. Change Needed to Decrease AD Wealth Taxes Interest rates The value of the domestic currency relative to the foreign currency4 . Determinants of short-run aggregate supply The following graph shows a decrease in short-run aggregate supply (AS) in a hypothetical economy where the currency is the dollar. Specifically, the short-run aggregate supply curve shifts to the left from ASi to A$2, causing the quantity of output supplied at a price level of 100 to fall from $200 billion to $150 billion. (?) 200 AS. 175 AS 150 125 100 PRICE LEVEL 75 50 50 100 150 200 2 300 350 400 QUANTITY OF OUTPUT 1. a) higher b) lower The following table lists several determinants of short-run aggregate supply. 2. , 3. a) improve b) decline Fill in the table by indicating the changes in the determinants necessary to decrease short-run aggregate supply. Change Needed to Decrease AS Inflation expectations Human capital Technology5 . Economic fluctuations I The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion. Suppose firms become pessimistic about future business conditions and cut back on investment spending. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the business pessimism. 240 O 200 AS AD 180 AS 20 1., 2., 3. a) fall below b) rise above PRICE LEVEL 4. a) adjust upward b) adjust downward 80 c) remain the same AD 5. a) aggregate demand 40 b) short run aggregate supply 6. a) left b) right 200 400 600 800 1000 1200 OUTPUT (Billions of dollars) In the short run, the decrease in investment spending associated with business pessimism causes the price level to 1 the price level people expected and the quantity of output to 2 the natural level of output. The business pessimism will cause the unemployment rate to 3 the natural rate of unemployment in the short run. Again, the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion, before the decrease in investment spending associated with business pessimism. During the transition from the short run to the long run, price-level expectations will 4 and the 5 curve will shift to the 6Now show the long-run impact of the business pessimism by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions. 240 O 200 AS AD O 180 AS 120 PRICE LEVEL 80 AD 1. a) increase b) decrease 40 c) remain the same 2. , 3. a) rise above 200 400 600 800 1000 1200 b) return to OUTPUT (Billions of dollars) c) fall below In the long run, as a result of the business pessimism, the price level 1 the quantity of output 2 the natural level of output, and the unemployment rate 3 the natural rate of unemployment.6 . The opportunity cost of holding money Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money. Interest Rate on Government Bond Opportunity Cost 1. 0.08 800 125,000 8 10,000 (Percent) (Dollars per year) 8 2. 10,0000 100,000 10 1,000 0.1 10 What does the previous analysis suggest about the market for money? The quantity of money demanded increases as the interest rate rises. O The quantity of money demanded decreases as the interest rate rises. O The supply of money is independent of the interest rate.7 . The theory of liquidity preference and the downward-sloping aggregate demand curve The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. 12 Money Supply O 10 Money Demand Money Supply INTEREST RATE (Percent) 1. a) greater b) less 2. a) increase b) decrease Money Demand 3. a) buy b) sell N 4. a) have to offer higher b) can offer lower 20 40 80 80 100 120 MONEY (Billions of dollars) After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will be 1 than the quantity of money supplied by the Fed at this interest rate. People will try to 2 their money holdings. In order to do so, people will 3 bonds and other interest-bearing assets, and bond issuers will find that they 4 interest rates until the money market reaches its new equilibrium at an interest rate of % The following graph shows the economy's aggregate demand curve.Show the impact of the increase in the price level by moving the point along the curve or shifting the curve. 180 O 150 Aggregate Demand 120 90 PRICE LEVEL 80 Aggregate Demand 30 1. a) fall b) rise 40 80 120 180 200 240 2. a) an increase b) a decrease OUTPUT (Billions of dollars) The change in the interest rate that you found previously will cause residential and business investment spending to 1 , leading to 2 in the quantity of output demanded in the economy.8 . The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is_ 1 and the spending multiplier for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to_ 3 . This increases income yet again, causing a second change in consumption equal to _ 4 . The total change in demand resulting from the initial change in government spending is 5 The following graph shows the aggregate demand curve (AD,) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD),) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out. Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD1). You can see the slope of AD, by selecting it on the graph. 1. , 2. 0.4 0.6 1 1.67 2.5 ? 3. $160 billion $1000 bil $240 bil $120 bil $500 bil 4. $160 bil $144 bil $500 bil $120 bil $1000 bil 140 AD A 5. $0.8 trillion $1 tril $0.6 tril $2.4 tril 135 AD2 130 125 120 PRICE LEVEL 115 110 105 100 3 7 OUTPUT (Trillions of dollars)9 . Changes in taxes The following graph shows the aggregate demand curve. Shift the aggregate demand curve on the graph to show the impact of a tax hike. (? 130 120 Aggregate Demand 110 100 PRICE LEVEL 90 Aggregate Demand 80 70 10 20 30 40 50 80 OUTPUT Suppose the governments of two different economies, economy ] and economy K, implement a tax cut of the same size. The tax cut in economy ] is permanent, while the tax cut in economy K is temporary. The economies are identical in all other respects. a) permanent tax cut b) temporary tax cut The tax cut will have a larger impact on aggregate demand in the economy with the