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

Answer:

a) monetary policy will be eased

b) Monetary policy will be tightened

c) Monetary policy will be eased

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