According to an article in the Wal Street Joumal, the Reserve Bank of India lowe

Question

According to an article in the Wal Street Joumal, the Reserve Bank of India lowered its key policy interest rate in 2015, "aiting weakness in parts of the economy as well as favorable inflation figures." The article notes that the central bank lists constraints to further interest rate cuts, including the "risk that inflation could flare again. Source: Gabriele Parussini, "India Cuts Key Interest Rate for Second Time This Year," Wall Street Journal, March 4, 2015. Use the dynamic aggregate demand and aggregate supply model to explain where the Reserve Bank of India expected the country's economy to be in 2015 without the interest rate cut. Assume, for simplicity, that real GDP in India in 2014 equaled potential GDP India expected A. aggregate demand, short-run aggregate supply, and long-run aggregate supply to shift to the right by the same amounts. B. aggregate demand and short-run aggregate supply to shift to the right but by less than long-run aggregate supply. O C. aggregate demand and short-run aggregate supply to shift to the right by more than long-run aggregate supply. O D. aggregate demand to shift to the right but by less than short-run aggregate supply and long-run aggregate supply. Next, detemine the desired equilibrium the central bank is trying to achieve with the interest rate cut The central bank's desired equilibrium is where the new short-run equilibrium is O A. to the left of the new long-run aggregate supply curve. B. on the new long-run aggregate supply curve. O C. on the original long-run aggregate supply curve. O D. to the right of the new long-run aggregate supply curve The Reserve Bank of India might be afraid that additional interest rate cuts would cause inflation to increase because it would O A. increase long-run aggregate supply sufficiently to increase the price level. O B. increase aggregate demand sufficiently to increase the price level. C. decrease aggregate supply sufficiently to increase the price level Q D. increase aggregate supply sufficiently to increase the price level

Explanation / Answer

1. Ans B) aggregate demand and short run aggregate supply to shift to the right but by less than long-run aggregate supply.

Without interestratecuts,the deamdn would increase but supply would increase more in the long run and thus economy would not get affected much.

2. Ans.A) to the left of the new long-run aggregate supply curve.

This is because new long run aggregate supply is more towards right direction and thus the short run equillibrium is to the left of the new long-run aggregatesupply curve.

3. Ans. B) increase aggregate demand sufficiently to increase the price level.

As there isinterest rate cut,the aggregate demand would increase and thus increasing the price level.

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