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: Cengage Learning
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Question
Chapter 15, Problem 11CQ
(a)
To determine
Identify the Fed policy to promote economic stability.
(b)
To determine
Identify the impact of expansionary
(c)
To determine
Identify the effect of an expansionary policy on the nominal interest rate and general price level.
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Students have asked these similar questions
a) Identify the four major tools of monetary policy. b) How can monetary policy address the problem of inflation?
When a central bank has driven down short-term
nominal interest rates to nearly zero, the monetary
policy can do nothing more to stimulate the economy.
True or false? Explain.
Which of the following is true for monetary policy?
Select one:
a. As a contractionary monetary policy, the Bank of Canada can increase the target for the overnight rate.
b. As an expansionary monetary policy, the central bank can buy bonds from the public to reduce a
inflationary gap.
c. The central bank can sell bonds during an economic downturn in order to stabilize the economy.
d. The central bank can use open market operations to change the target for the overnight rate.
Chapter 15 Solutions
Economics: Private and Public Choice (MindTap Course List)
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Similar questions
- “Monetary policy is the macroeconomic policy laid down by the central bank of an economy.”In terms of the above statement, explain how monetary policy can be used to combat inflationarrow_forwardWhich of the following is true of monetary policy? a. If the Fed wants to increase the money supply, it should increase the interest rate it pays banks on their reserves. b. The long and variable lags between a shift in monetary policy and when the policy shift affects output and employment makes it easier for the Fed to time monetary policy properly. c. A monetary policy that maintains price stability provides the foundation for both economic stability and the smooth operation of a market economy. d. The Fed should try to push real interest rates to the lowest possible level in order to stimulate investment and aggregate demand.arrow_forwardSuppose the Central bank were required to conduct monetary policy so as to hold the unemployment rate below 4%. What implications would this have for the economy?arrow_forward
- Suppose the Fed decides to implement expansionary monetary policy. This will likely result in a _____ in the money supply and a _____ in interest rates. increase or decrease?arrow_forwardIf the Federal Reserve wants to keep aggregate demand (i.e. spending growth) stable, what will it do to the growth rate of money supply when a lot of good news comes out about the economy increase it, decrease it, or leave it unchanged? Explain your answer.arrow_forwardWhat is the main argument for having a Central Bank independent from the government for the purposes of monetary policy? Select one: a. An independent Central Bank would have more resources available to devote towards implementing monetary policy b. An independent Central Bank would be more knowledgeable about the state of the economy. Consequently, the Central Bank would be better suited to implementing monetary policy c. The Central Bank is more credible in its inflation and cash rate targets. Consequently, inflation expectations will adjust appropriately to monetary policy announcements d. Having an independent Central Bank prevents any economic trade-offs when making monetary policy choicesarrow_forward
- 3. A. Suppose a collapse in consumer spending lowers GDP below potential and causes deflation in the economy. With the monetary policy rule that follows the Taylor Principle (the typical one we assume in lecture) should the central bank increase GDP above potential GDP? Why? B. In order to increase GDP what must the central bank do to interest rates? Is it always possible to raise GDP by changing the nominal interest rate? Why or why not?arrow_forwardAre you concerned about the inflation come back due to such easy monetary policy with zero interest rate for long time? if so, how fast is the Fed supposed to tighten its monetary policy as an normalizing strategy?arrow_forwardSuppose that the Bank of Canada determines that the Canadian economy is currently overproducing. What can the Central Bank do to slow down economic activity? a. The Central bank can pursue an expansionary monetary policy by increasing the money supply, causing a decrease in the interest rate. As a result, real GDP will increase and the price level will increase. b. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing a decrease in the interest rate. As a result, real GDP will decrease and the price level will decrease c. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing an increase in the interest rate. As a result, real GDP will decrease and the price level will decrease. d. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing an increase in the interest rate. As a result, real GDP will decrease and the price level will increase e. The…arrow_forward
- Which of the following is an appropriate monetary policy to combat a negative GDP gap? a. raise income tax rates b. increase government spending c. lower real interest rates d. raise real interest ratesarrow_forwardAssume that an economy is experiencing an economic contraction and the government decides to reduce taxes and increase government spending to stimulate the economy. By the way, Central Bank keeps money supply constant. i) Evaluate the effect of this policy on the a) Interest Rate , b)Money Demand (in the SHORT-RUN.) Explain and show your answer on the graph. ii)Evaluate the effect of this policy on output and price Level (in the LONG-RUN.) Explain and show your answer on the graph. Note : In figures, please label the axis and show the changes on the graphs using arrows.arrow_forwarda.What happens to the aggregate demand? b.What happens to the level of output? c.What happens to the price level? d. State your conclusion on the effect of the monetary policy made by the BSP.arrow_forward
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