Chapter 31, Problem 3CYU

a)

To determine

The short-run effect of expansionary monetary policy on the money supply curve

Explanation of Solution

In this case, the money supply curve shifts to the right because a market imbalance is created by a shift in the supply curve brought on by a change in supply, which is then corrected by a movement in prices and demand. As the supply curve's change in supply grows, the supply curve shifts to the right.

Moreover, the monetary policy of the central bank can be expanded in order to close the recessionary gap, and treasury bills may be purchased on the open market by the central bank, which would increase the money supply.

b)

To determine

The short-run effect of expansionary monetary policy on the equilibrium interest rate

Explanation of Solution

In this case, the equilibrium interest rate would decrease due to a decrease in interest rate as the central bank can expand the monetary policy to close the recessionary gap. It happens because the Fed will sell bonds at tempting rates to reduce the amount of money in circulation if the interest rate falls below its target level.

c)

To determine

The short-run effect of expansionary monetary policy on investment spending.

Explanation of Solution

In this case, investment consumption would increase because the monetary policy of the central bank can be expanded in order to close the recessionary gap, and treasury bills may be purchased on the open market by the central bank. It happens because more consumer spending, increased commerce internationally, and firms increasing their capital expenditures can all affect the volume of products and services produced in an economy.

d)

To determine

The short-run effect of expansionary monetary policy on consumer spending.

Explanation of Solution

In this case, consumer consumption will increase because the monetary policy of the central bank can be expanded in order to close the recessionary gap, and treasury bills may be purchased on the open market by the central bank, which would increase the money supply. This, in turn, increases consumer consumption.

e)

To determine

The short-run effect of expansionary monetary policy on aggregate output.

Explanation of Solution

In this case, the aggregate production or output would decrease because when the monetary policy of the central bank can be expanded in order to close the recessionary gap and treasury bills may be purchased on the open market by the central bank then the demand would exceed the output.