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Econ help please?
Suppose that survey measures of consumer confidence show that a large wave of pessimism regarding the future performance of the economy is sweeping the country. Likewise, U.S. stock price indexes (the Dow Jones Industrial Index, the S&P 500 Index, and the Nasdaq) are all falling rapidly.
If, in the short run, policy makers do nothing, what will happen to U.S. aggregate demand and what especially would we expect to happen to the “Personal Consumption” and “Domestic Private Investment” components of U.S. aggregate demand? Explain.
What, again in the short run, should the Federal Reserve do if it wants to stabilize aggregate demand? Please be specific in your discussion of the specific policy tools that are available to the Fed.
If the Fed were to do nothing, what might the U.S. Congress do to stabilize aggregate demand? Again, please be specific.
If both the Federal Reserve and the Congress were to do nothing, what could the President do to stabilize U.S. aggregate demand?
2 Answers
- xyzzyLv 77 years ago
Falling confidence / stock prices is a negative wealth affect. People feel less wealthy so they save more / spend less. This is declining AD. Most economists agree that this wealth affect exists, but they do not know how to measure it. Some don't believe in the wealth affect.
We would expect the fed to cut interest rate / buy bonds in open market operations / increase the money supply to stimulate AD.
Congress can't do all that much to stimulate demand in the short term. They can approve more infrastructure spending, but unless the project is "shovel ready" it could be a year before that spending creates jobs. And since they have to borrow money to initiate that spending, that can have a negative hit on confidence. And congress can cut taxes, but it could be a year before people are feeling richer because they got a bigger tax return.
If congress doesn't approve any money, there is even less that the president can do.
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