Consider an economy with a goods and services market and a money market as presented in class. If firms hardly increase the number of investment projects undertaken when interest rates fall and hardly reduce the number of investment projects undertaken when interest rates increase, then A) expansionary fiscal policy will be strong, but contractionary fiscal policy will be weak. B) it is vital that the Fed accommodate any fiscal policy. C) there is very little fiscal policy crowding out. D) monetary policy will have large impacts on the economy.
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Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and sketch a diagram using aggregate demand and aggregate supply curves to illustrate your answer: a. A recession. b. A stock market collapse that hurts consumer and business confidence. c. Extremely rapid growth of exports. d. Rising inflation. e. A rise in the natural rate of unemployment. f. A rise in oil prices.
Monetary policy affects the economy with a long lag, in part because A. proposals to change monetary policy must go through both the House and Senate before being sent to the president. B. changes in interest rates primarily influence investment spending, and firms make investment plans far in advance. C. monetary policy works through changes in interest rates, and the Fed does not have the ability to change interest rates quickly. D. changes in interest rates primarily influence consumption spending, and households make consumption plans far in advance.
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An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment and, as a result, the future growth rate of a. Is crowded out; potential output is reduced b. Rises to an unsustainable level; real GDP is reduced c. Increases; net exports increases. d. Is crowded out; corporate tax revenue is reduced e. Increases; aggregate demand increases
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