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Chapter 10: Q.21 (page 230)

Take a look at the panel (b) of Figure 10-6. If the Federal Reserve seeks to prevent secular deflation from taking place as a consequence of economic growth, how should it change the quantity of money in circulation? How would this policy action prevent secular deflation?

Short Answer

Expert verified

An expansionary financial strategy of the Federal Reserve can forestall the common collapse resulting in the monetary development in the country.

Step by step solution

01

introduction

Any adjustment of the condition of creative innovation and the amount/nature of component inputs causes the LRAS bend to move to one side.

02

explanation

This infers that expanded ability or efficiency permits the economy to deliver labour and products at a more elevated level. As the AD stays unaltered, in the event that the cost level doesn't fall, there will be an overabundance of an unsold load of labour and products in the economy over the long haul. This is shown by EA in the diagram beneath.

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Most popular questions from this chapter

For each question, s褖pose that the exonorm begins at the long-run equilibrium point Ain the diagram below. Identify which of the other points on the diagram-points B,C,D, or E-could represent a new long-run equilibrium after the described events take place and move the economy away from point A.

a. Significant productivity improvements occur, and the quantity of money in circulation increases.

b. No new capital investment takes place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same time, the government imposes a large tax increase on the nation's households.

c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government reduces its spending on goods and services.

Suppose that there is a sudden rise in the price level. What will happen to economywide planned spending on purchases of goods and services? Why?

Why might a return of the U.S. population growth rate to its prior level also tend to boost the growth of U.S. Long-run aggregate supply? (Hint: Recall that real GDP growth is generated by the contributions of growth in labour and capital and growth in productivity of these resources.)

How could a return of the U.S. population growth rate to its previous level reduce the disinflationary effect of secular stagnation?

Continuing from Problem 10-2,suppose that the full-employment level of nominal GDP in the following year rises to 21.85trillion. The long-run equilibrium price level, however, remains unchanged. By how much (in real dollars) has the long-run aggregate supply curve shifted to the right in the following year? By how much, if any, has the aggregate demand curve shifted to the right? (Hint: The equilibrium price level can stay the same only if LRAS and AD shift rightward by the same amount.)
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