1. Explain how the Central Bank can reduce the money supply with open market operations. Show the impact of this contractionary monetary policy on the interest rate and discuss the implications to the economy.2. Suppose the economy is in a recession with high unemployment. a. Identify a monetary policy that would restore the economy to its natural rate of employment and steady-state equilibrium output levels. Draw a graph of the money market to illustrate the effect of this monetary policy. Show the resulting change in the interest rate and discuss the implications. b. Identify a fiscal policy that would restore the economy to its natural rate of employment. Discuss the drawbacks and the benefits of this policy.

Open market operations are a monetary policy tool employed by central banks to regulate the money…

1. Explain how to the Central Bank can reduce the money supply with open market operations. Show the impact of this contractionary monetary policy on the interest rate and discuss the implications to the economy.

1. Explain how to the Central Bank can reduce the money supply with open market operations. Show the impact of this contractionary monetary policy on the interest rate and discuss the implications to the economy.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

1. Explain how the Central Bank can reduce the money supply with open market operations. Show the impact of this contractionary monetary policy on the interest rate and discuss the implications to the economy.

2. Suppose the economy is in a recession with high unemployment.

a. Identify a monetary policy that would restore the economy to its natural rate of employment and steady-state equilibrium output levels. Draw a graph of the money market to illustrate the effect of this monetary policy. Show the resulting change in the interest rate and discuss the implications.

b. Identify a fiscal policy that would restore the economy to its natural rate of employment. Discuss the drawbacks and the benefits of this policy.

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Step 1: Introduce the concept of open market operations and contractionary monetary policy.

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Step 2: 1. Explain how to the Central Bank can reduce the money supply with open market operations.

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Step 3: 1. Show the impact of this contractionary monetary policy on the interest rate.

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