Question 5 (20 points) Answer the following short-answer...

Question 5 (20 points) Answer the following short-answer questions: (a) Which institution is the central bank of the US? What about of the Eurozone and Bulgaria? Where are the headquarters of the central bank that is responsible for the monetary policy of the Eurozone? (b) Define the peak, through, expansion and the boom of business cycles. (c) Define the output gap (d) What differentiates a stock of company from a bond issued by the same company?

Transcript

00:01 Today we'll be solving problem 23 from chapter 29 of economics 12 edition.

00:07 From economics in the news on the stagnating eurozone.

00:10 Part a wants to know what macroeconomic issues face the eurozone that the ecb is trying to resolve.

00:18 So the inflation rate in the eurozone is growing below the desired levels.

00:23 This is stemming from a decrease in demand from unemployment and indicating potential stagnation due to deflation.

00:30 Part b wants to know.

00:32 Is the unemployment problem in the eurozone structural, cyclical, or both, and how do we know? so the unemployment problem in the eurozone is both structural and cyclical.

00:43 The prolonged recession, starting in 2008 and the failure of the ecb to expand the money stock quickly enough, have caused cyclical unemployment from changes in the economic cycle.

00:55 However, the fact that the eurozone unemployment has been persistently higher than u .s.

01:00 Unemployment is evidence of structural unemployment issues that likely stem from high minimum wages, generous benefits, and labor market regulations.

01:10 Part c asks, what type of unemployment can the ecb alleviate? since the ecb cannot change legislative policy in the eurozone, such as minimum wage and labor market regulations, they do nothing to alleviate structural unemployment in the eurozone.

01:28 However, if the ecb takes action, such as lowering policy interest rates and purchases of asset -backed securities, it can expand the money stock and decrease cyclical unemployment.

01:40 So the ecb can alleviate only cyclical unemployment.

01:44 Part d of this question wants you to plot the changes in aggregate demand and aggregate supply that have created the eurozone's macroeconomic issues.

01:53 And i've plotted these changes on the left, and now i'll explain them.

01:56 So the economy is suffering from a persistent decrease in aggregate demand stemming from unemployment.

02:03 So what's going to happen is the aggregate demand curve is going to shift to the left.

02:11 And our equilibrium point is going to move from where short -owned aggregate supply zero is equal to aggregate demand zero to where short -earned aggregate supply zero is equal to aggregate demand 1.

02:21 So we're going to move from an equilibrium point of here to here.

02:30 And at this point, we can see that inflation has decreased, there's been some deflation, and now real gdp is below potential gdp at g1.

02:40 Now, real gdp cannot remain below potential gdp forever.

02:44 With unemployment above its natural rate, there's an excess of people seeking labor, and the money wage rate increases.

02:51 Because of the increase in the money wage rate, there's going to be an increase in short -run aggregate supply or a rightward shift in the short -run aggregate supply curve.

03:01 Our equilibrium point is going to move back to where real gdp is equal to potential gdp...

Question

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