CASE ANALYSIS: BEN S.

BERNANKE IN 2005
MACRO ENVIRONMENT OF BUSINESS

NAME: Aparajita Ghosh

SECTION: A
ROLL NO.: PGP13041

Q. What should Ben do?

The problems outlined in the case are as follows:

(i) Oil prices are rising
(ii) House prices may fall
(iii) Higher federal budget deficit

The LM curve is also moving to the left as oil prices rise, along with the IS curve. Because of
this, the economy's output will decline, and it is ambiguous how this will affect the interest rate.

The IS curve will move to the left as housing prices fall, while the LM curve will move to the
right. There won't be any significant differences in the level of output, but this will lower the real
interest rates in the economy.

From these observations, we can say that Ben should refrain from adopting an expansionary
monetary policy because doing so will allow housing prices to mitigate the effect of rising oil
prices on the IS curve. Because of the government's expansionary fiscal policy, the IS curve will
be moved to the right in this case. In this way, the output will also remain unchanged.