Demonstrate Graphically and Explain Verbally (Using the AS/AD Model)the Effect

question 129

Essay

Demonstrate graphically and explain verbally (using the AS/AD model)the effect of the Fed's sale of government bonds when the economy is below potential.

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Definitions:

Coase Theorem

A principle that asserts that when trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property.

Government Intervention

The involvement of the government in the market, aiming to alter the allocation of resources and distribution of goods and services.

Efficient Outcome

An economic situation in which all resources are allocated in the most effective way possible, maximizing potential benefit.

Negative Externality

A negative effect or cost suffered by a third party due to an economic transaction they were not involved in.