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- 7. Critical analysis Q16 Suppose that the Federal Reserve purchases a bond for $300,000 from Reggie Rich, who deposits the proceeds in the Manufacturer's National Bank. Initially, as a result of this bond purchase, the money supply will Suppose the required reserve ratio is 25%. As the result of Rich's deposit, Manufacturer's Bank will be able to extend $ by $ in additional loans. As a result of this purchase by the Fed, the maximum increase in the quantity of checkable deposits that could result throughout the entire banking system is $Attempts 2. The theory of liquidity preference and the downward-sloping aggregate-demand curve The following graph shows the money market in a hypothetical economy. Assume that the central bank fixes the quantity of money supplied. Suppose the price level increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. ? INTEREST RATE (Percent) Average/4 18 15 1-3°C Cloudy Money Supply Money Demand Money Demand 1 Money Supply T Q Search 2016 W acerAnalyse the impact of these events on the price level and total output of an economy in the short term. If policymakers were to use monetary policy to actively stabilize the economy, in which direction should they move the money supply and interest rate and show the effects of these policies? Please discuss your answers with appropriate graphs. - (a) The government raises taxes and reduces expenditures to balance its budget. (b) Enterprises in the economy are pessimistic about the economy in the future. - (c) Foreigners increase their taste for domestically produced beef. (d) The money wage rate rises.
- 4. [A Monetary Surprise] Consider an economy in which the demand for money is of the form M₁ = = P₁Y for t = 0, 1,2,..., where output is 150, the money velocity is 1.5. The money supply is 100 for t = 0, 1. In period 2, the central bank surprises people and announce that money supply will grow at 2 percent forever, that is, Mo = 100, M₁ = 100, M₂ = (1.02) M₁, M3 (1.02) M₂, and so on. (a) What is the inflation rate in period 1, 7? What is real money balance in period 1, ? What is the expected inflation in period 2, given the information available in period 1, E172? (b) What is the inflation rate in period 2, m₂? What is real money balance in period 2, 2? What is expected inflation in period 3, given the informa- tion available in period 2, E273? (c) What is the inflation rate in period 3, 73? What is real money balance in period 2, ? (d) Compare E₁₂ and 7₂. B8urgent
- 3. Explain the wealth effect or the interest rate effect of why the aggregate demand (AD) curve is downward sloping.1953. Suppose the Canadian economy had a recessionary gap. To increase the level of desired aggregate expenditure, the Bank of Canada could increase the reserve requirements of the commercial banks. increase its spending. sell securities in the open market. raise the bank rate. reduce its target for the overnight interest rate.
- True or false. Explain. 1. For a given level of P (price), is M (nominal money) increases by 10%, M/P also increases by 10%. 2. A monetary expansion leads to a lower output and a higher interest rate. 3. Equilibrium in the financial market implies that an increase in income leads to a decrease in interest rate making the LM curve downward sloping.1A.) What do researchers mean when they ask “Why does monetary policy have real effects on the economy?" 1B.)Use the evidence in the table (image) to discuss the research main findings and its implications for macroeconomic policy.Below, discuss the implications of the Federal Reserve’s Policy Statement on Tuesday that they will continue to spend $120 Billion per month on bond purchases. First, why do you think they are doing this in regard to interest rates. Second, what is the impact on the supply of money in the economy. 1.) Implications of the Federal reserve Policy statement to continue to spend 120 Billion per month on Bond purchases. Explain 2.) Why do you think they are doing this regarding interest rates? 3.) What is the impact on the supply of money in the economy?