The federal government may increase a budget deficit or reduce a budget surplus. The federal government may respond by cutting corporate tax rates. The Federal Reserve historically lowers real interest rates during recessions. During a recession, expectations of future revenues are uncertain.
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Step 1: The federal government may increase a budget deficit or reduce a budget surplus in response to a recession in order to stimulate the economy. Show more…
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Akash M.
In the mainstream view, monetary policy is not very effective during a severe recession. Why? A. Monetary policy only impacts the interest rate, and consumption must increase in order to get out of a recession. B. The liquidity trap prevents monetary policy from causing additional investment spending. C. Monetary policy is separated from the political sphere, and the officials in charge do not have the best interest of the people in mind. D. Crowding out causes government spending to have no real impact on the economy. 2. In real business cycle theory, which of the following is the driving force of macroeconomic instability? A. technology changes and innovation B. changes in expenditures, which impact AD C. bad monetary policy D. uncertainty about risky investment returns 3. An April 2023 op-ed in the New York Times suggested that the United States is likely headed for a recession. The author noted that lending has decreased and that "there are signs that the observable dip in loans and leases is at least partly due to weak demand." The author also states, "When you really have to start worrying is when people don't want to borrow because they see bad times ahead. In that situation, monetary policy becomes less effective; lowering the interest rate to induce borrowing is as useless as pushing on a string, as economists like to say." According to what we learned in class, based on these quotes, the author's viewpoint is closest to: A. The mainstream viewpoint B. The monetarist viewpoint C. The real business cycle theory viewpoint D. The self-correction viewpoint
Because of the economic slowdown associated with the $2007-2009$ recession, the Federal Open Market Committee of the Federal Reserve, between September $18,2007,$ and December $16,2008,$ lowered the federal funds rate in a series of steps from a high of $5.25 \%$ to a rate between zero and $0.25 \%$. The idea was to provide a boost to the economy by increasing aggregate demand. a. Use the liquidity preference model to explain how the Federal Open Market Committee lowers the interest rate in the short run. Draw a typical graph that illustrates the mechanism. Label the vertical axis "Interest rate" and the horizontal axis "Quantity of money." Your graph should show two interest rates, $r_{1}$ and $r_{2}$ b. Explain why the reduction in the interest rate causes aggregate demand to increase in the short run. c. Suppose that in 2015 the economy is at potential output but that this is somehow overlooked by the Fed, which continues its monetary expansion. Demonstrate the effect of the policy measure on the $A D$ curve. Use the $L R A S$ curve to show that the effect of this policy measure on the $A D$ curve, other things equal, causes the aggregate price level to rise in the long run. Label the vertical axis "Aggregate price level" and the horizontal axis "Real GDP."
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