Effect of change in tastes on equilibrium level

Reference no: EM1312693

Suppose that American households change their tastes such that they want to save more at every level of income.

1. With the help of a Keynesian cross diagram, explain the effect that this change in tastes will have on the equilibrium level of output.

2. Suppose that the Fed uses open market operations to offset the effect of the change in saving on output. Explain what it must do to get output back to its original level. Will the composition of demand be the same as it was originally? Explain.

3. Explain under what conditions (more than one) the Fed's policy would be ineffective. If monetary policy were ineffective, what would be the alternative? Explain your answer.

Reference no: EM1312693

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