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One of the major objections to government budget deficits is that they may be inflationary. In addition, some worry that the Federal Reserve may monetize part of the deficit by buying some of the newly issued debt, potentially causing even more inflation. In general, a tax cut increases both real GDP and the price level, since it causes aggregate demand to increase. The following graph shows the demand and supply of bank reserves. Show the initial effect of this economic expansion, before any monetary policy intervention, on the market for bank reserves by shifting the demand curve, the supply curve, or both. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. INTEREST RATE (Percent) CD 10 5 st ♡ N 0 0 Supply Demand 100 200 300 400 500 QUANTITY OF BANK RESERVES (Millions of Dollars) 600 Demand Supply (?)

One of the major objections to government budget deficits is that they may be inflationary. In addition, some worry that the Federal Reserve may monetize part of the deficit by buying some of the newly issued debt, potentially causing even more inflation. In general, a tax cut increases both real GDP and the price level, since it causes aggregate demand to increase. The following graph shows the demand and supply of bank reserves. Show the initial effect of this economic expansion, before any monetary policy intervention, on the market for bank reserves by shifting the demand curve, the supply curve, or both. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. INTEREST RATE (Percent) CD 10 5 st ♡ N 0 0 Supply Demand 100 200 300 400 500 QUANTITY OF BANK RESERVES (Millions of Dollars) 600 Demand Supply (?)

ECON MACRO
ECON MACRO
5th Edition
ISBN:9781337000529
Author:William A. McEachern
Publisher:William A. McEachern
Chapter15: Monetary Theory And Policy
Section: Chapter Questions
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6. Monetizing the deficit One of the major objections to government budget deficits is that they may be inflationary. In addition, some worry that the Federal Reserve may monetize part of the deficit by buying some of the newly issued debt, potentially causing even more inflation. In general, a tax cut increases both real GDP and the price level, since it causes aggregate demand to increase. The following graph shows the demand and supply of bank reserves. Show the initial effect of this economic expansion, before any monetary policy intervention, on the market for bank reserves by shifting the demand curve, the supply curve, or both. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. INTEREST RATE (Percent) 10 5 m N 1 0 0 Supply Demand 100 200 300 400 500 QUANTITY OF BANK RESERVES (Millions of Dollars) 600 Demand Supply ?
Transcribed Image Text:6. Monetizing the deficit One of the major objections to government budget deficits is that they may be inflationary. In addition, some worry that the Federal Reserve may monetize part of the deficit by buying some of the newly issued debt, potentially causing even more inflation. In general, a tax cut increases both real GDP and the price level, since it causes aggregate demand to increase. The following graph shows the demand and supply of bank reserves. Show the initial effect of this economic expansion, before any monetary policy intervention, on the market for bank reserves by shifting the demand curve, the supply curve, or both. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. INTEREST RATE (Percent) 10 5 m N 1 0 0 Supply Demand 100 200 300 400 500 QUANTITY OF BANK RESERVES (Millions of Dollars) 600 Demand Supply ?
If the Federal Reserve does not counteract this expansionary fiscal policy, the interest rate will the Fed can engage in which will the illustrate this reaction by the Fed on the preceding graph.) Statement In the following table, indicate whether each statement about the effects of the Fed monetization of the deficit is true or false. The quantity of bank reserves in the economy increases only if the Fed monetizes the deficit. Monetized deficits are more inflationary than nonmonetized deficits. . To prevent this from occurring, True False bank reserves. (Note: Do not
Transcribed Image Text:If the Federal Reserve does not counteract this expansionary fiscal policy, the interest rate will the Fed can engage in which will the illustrate this reaction by the Fed on the preceding graph.) Statement In the following table, indicate whether each statement about the effects of the Fed monetization of the deficit is true or false. The quantity of bank reserves in the economy increases only if the Fed monetizes the deficit. Monetized deficits are more inflationary than nonmonetized deficits. . To prevent this from occurring, True False bank reserves. (Note: Do not
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