Suppose the Federal Reserve ("the Fed") shifts to a contractionary monetary policy by selling bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's contractionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to INTEREST RATE (Percent) 15 24 0 0 300 600 Money Supply 900 Money Demand 1200 1500 1800 QUANTITY OF MONEY (Billions of dollars) Money Demand -0- Money Supply The following graph shows the demand for investment. Show the short-run effect of the Fed's contractionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have on the top graph. INTEREST RATE (Percent) 15 24 0 40 20 120 160 200 240 INVESTMENT (Billions of dollars) The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. PRICE LEVEL on the top graph. INTEREST RATE (Percent) 18 40 80 120 Ο 160 INVESTMENT (Billions of dollars) 200 240 The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. REAL GDP (Trillions of dollars) AD AS AD Fill in the blanks to interpret the effect of the Fed's policy. AS When the Fed sells bonds, the amount of money in circulation in the economy businesses to invest This drives interest rates which causes demand, in capital improvements such as new factories and upgraded equipment. The result is in the equilibrium price level, and in aggregate in the equilibrium level of real GDP.
Suppose the Federal Reserve ("the Fed") shifts to a contractionary monetary policy by selling bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's contractionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to INTEREST RATE (Percent) 15 24 0 0 300 600 Money Supply 900 Money Demand 1200 1500 1800 QUANTITY OF MONEY (Billions of dollars) Money Demand -0- Money Supply The following graph shows the demand for investment. Show the short-run effect of the Fed's contractionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have on the top graph. INTEREST RATE (Percent) 15 24 0 40 20 120 160 200 240 INVESTMENT (Billions of dollars) The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. PRICE LEVEL on the top graph. INTEREST RATE (Percent) 18 40 80 120 Ο 160 INVESTMENT (Billions of dollars) 200 240 The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. REAL GDP (Trillions of dollars) AD AS AD Fill in the blanks to interpret the effect of the Fed's policy. AS When the Fed sells bonds, the amount of money in circulation in the economy businesses to invest This drives interest rates which causes demand, in capital improvements such as new factories and upgraded equipment. The result is in the equilibrium price level, and in aggregate in the equilibrium level of real GDP.
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter13: Money And The Banking System
Section: Chapter Questions
Problem 16CQ
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