a. (1 point) When the United States is at point A, we are in long-run macroecono

Question

a. (1 point) When the United States is at point A, we are in long-run macroeconomic equilibrium. What other point on the AS-AD graph would we be at long-run macroeconomic equilibrium?

b. (3 points) Starting a point C, what point would we move to if there was an increase in the capital stock of the United States?

c. (3 points) Starting a point A, what point would we move to if the Federal Reserve engaged in buying numerous securities?

d. (5 points) Based on the point you arrive at in 5(c), NAME AND EXPLAIN a policy that either the Federal Reserve or U.S. Government can implement to bring us back to long-run macroeconomic equilibrium.

Explanation / Answer

a. we could in long-run equilibrium on long-run LRAS at point C

b. When capital stock increases, the AS curve shifts outwards to SRAS2 with a new equilibrium at point D

c. If teh FED bought securities, it pumps up AD to right with a new equilibrium at point D

d. Due to the open market operations of theFED, the AD curve has shifted in the shortrun from AD2 to AD1 at the economy is at poit D on the AD-AS curve. The Economy can either move back to point C, which is a long-run equilibrium point or it can be brought back to point A, The first strategy involves raising short-run output curve upards, by investments in productive capacity. The government can undertake massive infra-structural projects that improve marginal efficiecy of production in a big way. There will a time-lag for such a policy and inthe mentime, rise in inflationary levels are to be expected. To control inflation, teh FED needs to simultaneoulsy buy-back the securites and increase the staturtory reserve requirements with the banks so that interest rates and yields are contatined, during this phase. Thsi will indeed be a tight-rope walking, becasue, expansionary pressures of government spending needs to be empered by appropriate monetary mesures to control infaltion.

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