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The economy is in a recession with high unemployment and low output.a. Draw a graph of aggregate demand and aggregate supply to illustrate the current situation. Be sureto include the aggregate-demand curve, the short-run aggregate-supply curve, and the long-run aggregate-supply curve.b. Identify an open-market operation that would restore the economy to its natural rate.c. Draw a graph of the money market to illustrate the effect of this open-market operation. Show theresulting change in the interest rate.d. Draw a graph similar to the one in part a to show the effect of the open-market operation on outputand the price level. Explain in words why the policy has the effect that you have shown in thegraph.
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in question five. We're dealing with an economy that is in a recession, with high unemployment and low output. Part one asked us to draw a graph of the agri demanding Magritte supply to illustrate the current situation. They sure to include the Agra demand curve. The short run I would supply her and the longer and accurate supply car. All right, well, now we know how to do that. We resort into a standard I agree supplying, agree, demand curve on the exact as we have a point about why on the Y axis will have a price level peen. As always, the longer inaccurate supply corps will be vertical, since it's determined by longer and factors such as the accumulation of labor, capital, landry sources, technology and the agri productivity level, and it will dissect the X axis at the natural level. Felt what? Why star, In contrast, the upward sloping average supply curve Alias one will dissect that downward sloping every demand curve. 81. I had a point off and to the left of the longer and Hagrid's of like her, those resulting into a lower level found put what I want and the difference between Why Juan and why star will be the recessionary gap. All right, we're going to answer part being seek together, since it very closely related we're being elsewhere, then to find open market operation that would restore the economy to its natural rate and draw a graph of the money market to illustrate the effects of this open market operation. Well, as we know, the Fed has a multitude of ways with which they can affect the IG liberal interest rate, such as changing the reserves of the banks, using unconventional monetary policy, forward guidance and someone so forth. But here we're being ass Teo, determine an open market operation. Understanding one is that the Fed will purchase govern bonds from the public. This means that the Fed will tell its traitors. All right, guys, just go on and keep buying. Govern Bonds on do it as long as it by as much as it is enough to lower the interest rates, who a desired level? All right. To show how this works, we gonna joy simple supply and demand, Curt for the money market on the exact is we have the quantity of money am on the Y axis we have. The interest rates are the economy is being described by the downward sloping money demand curve and one em D one and the Fed, through its open market operations, is shifting thing Money supply liquor from him. Want m s one to the left toe am Teo Emma's, too. And thus the the the new money supply curve dissect the Monday night curve Ana different point. The results of the lower interest rate. Our star, which is the natural rate. All right, party. We're being asked to joy graph similar to the one party to show the effect of the open market operation and output and the price level. Explain in words why the policy is the effect that you have shown in the graph. All right, so here on the right, I have recreated the first draft. But now we know that the feds purchase of government bonds will stimulate, agree demand. Right. So the average man curves ships from a d, want a baby, too. And this new curve intersects with a great supply curve on the longer and migrants a placard rights of this point here, him, uh, means that the economy is back to its natural level found with y star. So how does this actually work? It works through the interest rate effect. The Fed ensures that interest rate drops from our one war star. So this creates incentives. Were consumers to consume more as opposed to saving their money printing during the in the bank? Because now they're facing a lower interest rate, so they were not going to make us much interest if they deposit their money. And on the other hand, it's also creating an incentive for the businesses to invest into projects, since we're facing a lower interest rate and it's easier together alone and invest in your project.
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