38. Problem
Recession
Shift AD to
Right
Inflation
Shift AD to Left
Tools
Increase
Money Supply
Decrease
Money Supply
Reserve Ratio Lower Raise
Discount Rate Lower Raise
Open Market
Operations
Buy Bonds
from the Banks
Sell Bonds
to the Banks
Excess Reserves
Interest Rate
Lower Raise
40. The graph below shows the US economy in long run equilibrium
with a spending growth of 13 percent, a 9 percent inflation rate, and
a 4 percent real GDP growth.
Step 1: Suppose that to reduce inflation the Fed permanently
decreased money supply growth by 5 percent. Using the copy tool,
show the short run effect this would have by shifting and labeling
the appropriate curve(s). Plot the new short run equilibrium using
the double drop line tool and label it Equilibrium 2.
Step 2: Show how the economy will adjust in the long run by shifting
and labeling the appropriate curve(s). Plot the new long run
equilibrium and label it Equilibrium 3.
Total Spending Rate = Inflation Rate + Real GDP Growth Rate
13% = 9% + 4%
8% = 4% + 4%
41. 0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Real GDP Growth Rate
Inflation
Rate
Total Spending = Inflation Rate + Real GDP Growth Rate
13% = 9% + 4%
Reduce Money Growth Rate by 5%
Reduces Inflation Rate from 9% to 4%
8% = 4% + 4%
Short Run 8% = 7% + 1%
T.S. = 13%
T.S. = 8%
Long Run 8% = 4% + 4%
RecessionGrowth
42. Because prices are sticky going
down, you cannot reduce inflation
without having a temporary
recession
As the price level falls, spending
increases back to capacity
44. The graph below shows the US economy in long run
equilibrium with a spending growth of 13 percent, a 9 percent
inflation rate, and a 4 percent real GDP growth.
Total Spending = 13%
45. Step 1: Suppose that to reduce inflation the Fed permanently
decreased money supply growth by 5 percent. Using the copy tool,
show the short run effect this would have by shifting and labeling the
appropriate curve(s). Plot the new short run equilibrium using the
double drop line tool and label it Equilibrium 2.
Inflation 9% to 4%
Push Down by 5%
1
2
46. Step 2: Show how the economy will adjust in the long run by
shifting and labeling the appropriate curve(s). Plot the new
long run equilibrium and label it Equilibrium 3.
Inflation 9% to 4%
1
2
3
2
47. Suppose the Fed permanently increases money supply
growth by 3 percent. Using the copy tool, show the short run
effect this would have by shifting and labeling the appropriate
curve(s). Plot the new short run equilibrium using the double
drop line tool and label it Equilibrium 2. .
1
3
2
