Is this rule based policy pro-cyclical or countercyclical

Reference no: EM13695955

Draw an AD/AS graph and a money market graph side-by-side. For the money market, use an upward sloping money supply curve and assume that the equilibrium interest rate in the money market is 5%.

Also, assume that actual GDP is at full employment and that the equilibrium price level in the AD/AS graph is 100.

(i) Now shift AD to the right based on an increase in animal spirits. Show how the money market graph will adjust to a new equilibrium. Then explain and show what happens if the Fed acts to keep the equilibrium quantity of money constant.

(ii) Is this rule based policy pro-cyclical or countercyclical? (explain)

Reference no: EM13695955

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