Question

5) In class we discussed different shocks; for each of the following, describe how monetary policymakers would respond (if at all) to stabilize economic activity. a. A reduction in autonomous consumption. related to consumer spending. b. An increase in government expenditures. c. An appreciation of the dollar relative to other currencies.

Answer 1

Monetary policymakers use expansionary or contractionary monetary policies to respond to different economic shocks, aiming to either stimulate economic activity or to cool down the economy and control inflation, depending on the specific situation such as a decrease in consumption, increase in government spending, or currency appreciation.

Step-by-step explanation:

Monetary policymakers have a set of tools to respond to different economic shocks to stabilize economic activity. In response to:

• A reduction in autonomous consumption: Policymakers may implement an expansionary monetary policy, such as lowering interest rates and increasing the money supply to encourage borrowing and spending, thereby stimulating output and decreasing unemployment.
• An increase in government expenditures: Originally, this falls under fiscal policy, but monetary policymakers might consider a neutral stance if the economy is at or near potential GDP to avoid overheating. If inflation is a concern, they might enact a contractionary monetary policy to cool down the economy by raising interest rates and reducing the money supply.
• An appreciation of the dollar relative to other currencies: Usually, monetary authorities might counteract this by adopting a more expansionary stance as well, with lower interest rates to decrease the value of the dollar, making exports more competitive and stimulating economic growth.

Overall, the goal of monetary policymakers is to manage the supply of money in a way that helps to achieve macroeconomic stability, balancing between growth and inflation.

Answer 2

a) monetary policy will be eased

b) Monetary policy will be tightened

c) Monetary policy will be eased

Step-by-step explanation:

A) A reduction in autonomous consumption

A reduction in autonomous consumption will cause the monetary policy makers to apply an autonomous easing of monetary policy and this is to help balance the economy because of the reduction seen in aggregate demand

b) An increase in government expenditures

An increase in government expenditures will result in an increase in demand hence monetary policy will be made tighter in order to balance the economy activities

c) An appreciation of the dollar

when the dollar appreciates relative to other currencies the effect is that there will be a decrease in exports and increase in imports, hence the monetary policymakers will apply an autonomous easing of monetary policy to help balance economic activities