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Chapter 24: Q. 17 (page 655)

Assume that aggregate output is below the natural rate level. What would an activist policy recommend that the government do? Explain your answer.

Short Answer

Expert verified

Because changes in the aggregate demand curve have a relatively small influence on output and unemployment in the economy.

Step by step solution

01

Step 1. Introduction

The total amount of final goods and services provided into an economy's market in a given period of time is known as aggregate supply.

02

Step 2. Explanation

The steep short run aggregate supply curve will support non-activist policy since changes in the aggregate demand curve will have a relatively limited impact on output and unemployment in the economy.

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Most popular questions from this chapter

Suppose that f is determined by two factors: financial panic and asset purchases.

  1. Using an MP curve and an AS/AD graph, show how a sufficiently large financial panic can pull the economy below the zero lower bound and into a destabilizing deflationary spiral.
  2. Using an MP curve and an AS/AD graph, show how a sufficient amount of asset purchases can reverse the effects of the financial panic depicted in part (a).

Why does the divine coincidence simplify the job of policymakers?

Suppose that welfare gains derived from eliminating output (and unemployment) fluctuations in the economy can be measured. Assuming these gains are relatively small for the average individual, how do you think this measurement would affect the activist/ nonactivist debate?

As monetary policymakers become more concerned with inflation stabilization, the slope of the aggregate demand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curve help stabilize inflation when the economy is hit with a temporary negative supply shock? How does this affect output? Use a graph of aggregate demand and supply to demonstrate.

“Policymakers would never respond by stabilizing output in response to a temporary positive supply shock.” Is this statement true, false, or uncertain? Explain your answer.
See all solutions

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