Consider a recently foundedDel Griffitheconomy,Park, whose politicians are debct economicpolicies to implement. They arewhether or not to found a central bank andConsideringtheir owndollars for all the rency. Right now,they use Ustransactions and thus aresubject tomonetary policy dicfated by theFederal Reserve. Banks in the economy like tohold reserves,when interest rates are low, anddislike holding reserver when interest rates andhigh, and can borrow and lend withus banks atthe us Federal funds Rate. The government ofDel Griffith pack issues debt to finance it'soperations thatis indexed to the US federal fundsrate.A 2QuestionDraw the supply and demand Curvesmarket for reserves. Be sure to label the axes.inthecorrectly! Then explain why each are has theshape that it does, 1.2., why the demand corve isdownward sloping, e.t.c.

The classical economist considers fiscal policies unnecessary as there are market mechanisms like the flexible adjustments of wages and prices keep the economy at or near the natural level of real GDP at all times. Therefore, classical economists believe that the government of a nation should run a balanced budget for every year.The expansionary fiscal policy i.e. increase in public spending and reduction on taxes are the most important elements, in an anti-depression economy.In the expansionary fiscal policy, the interest rates are lowered in order to increase investments in the economy. Hence, Investments increases.It can be demonstrated as follows:G ↑ → AD ↑ → Y ↑ → Md ↑ → r ↑ → I↓This can be seen with the graph below:Initially, IS=LM and the interest rate is r and output is Q. When there is an expansionary fiscal policy IS shifts to the right to IS1 and if the interest rate is same the output exceeds the equilibrium level as AD>AS. Now, when interest rate rises investment demand falls and AD falls which leads the output level to come to the original level Q. There is an expansionary fiscal policy i.e. reduction in taxes and is done in an anti-depression economy.In the expansionary fiscal policy, the interest rates are lowered in order to increase investments in the economy. Hence, Investments increases. There is an increase in disposable income so the aggregate demand increases.Three reasons that show the Demand curve is downward sloping:1-Pigou's wealth effect. It states that the real value of money depends on the price level and a lower price level or inflation gives a higher purchasing power per unit of money. When the price decreases the consumer becomes wealthier and thus can spend more and increase the aggregate demand.2-Keynes's interest-rate effect – It says that the price level affects the quantity of money, that is, a higher price level means that a relatively large amount of money is used to purchase goods or services. Thus, consumer will demand higher quantities of money when the price level is high. Vice versa happens in the case of low-price level. Thus, consumers will keep larger amounts of money in the bank and as the amount of money in the banks rises, the loan supply increases which in turn will reduce the interest rates. A lower interest rate will increase demand for investments and thus will increase the aggregate demand.3-Mundell-Fleming's exchange-rate effect – If the price level falls, interest rates also fall, and lower domestic interest rates will force domestic investors to invest in foreign countries where they can earn a higher rate of return. This will lead to falling in the exchange rate as the domestic currency is flowing out of the economy and foreign currencies are flowing into the economy. Now domestic goods become cheaper for foreign countries. Hence, net exports rise and thus leading to an increase in aggregate demand.

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Consider a recently founded economy, Parls, whose politicians are debating policies to implement. They are first considering whether or not to found a central bank and Issue their own currency. dollars for all their transactions and thus are Right now, they use Us subject to monetary policy dicfated by the Federal Reserve. Banks in the economy like to hold reserves. when interest rates are low, and Del Griffith economic us banks at dislike holding reserver when interest rates are high, and can borrow and lend with the us Federal funds Rate. The government & Del Griffith Pack issues debt to finance its operations that is indexed to the us federal funds rate. A 2 Question Draw the supply and demand Curves market for reserves. Be sure to label the axes. in the correctly! Then explain why each are has the shape that it does, 1.e., why the demand corve is downward sloping, e.t.c..

Consider a recently founded economy, Parls, whose politicians are debating policies to implement. They are first considering whether or not to found a central bank and Issue their own currency. dollars for all their transactions and thus are Right now, they use Us subject to monetary policy dicfated by the Federal Reserve. Banks in the economy like to hold reserves. when interest rates are low, and Del Griffith economic us banks at dislike holding reserver when interest rates are high, and can borrow and lend with the us Federal funds Rate. The government & Del Griffith Pack issues debt to finance its operations that is indexed to the us federal funds rate. A 2 Question Draw the supply and demand Curves market for reserves. Be sure to label the axes. in the correctly! Then explain why each are has the shape that it does, 1.e., why the demand corve is downward sloping, e.t.c..

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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