Question 4. Suppose that the bank of Canada uses money to buy bonds in financial markets during a recession. a. Use the theory of liquidity preference to graphically illustrate the impact of this purchase of bonds in open markets by the bank of Canada on the equilibrium interest rate in the market for real money balances. Be sure to label: į. the axes; ii. the curves; i. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values. Explain what happens to the equilibrium interest rate. b. How would this policy change affect nominal interest rates in the short run and the long run? Explain your answer using macroeconomic models that we studied in the past semester.
Monetary Policy and Equation of Exchange
The monetary policy has been defined as the policy that is used by the Federal Reserve (the central bank of the US) or the central bank (the central bank of India is RBI) along with the use of the supply of money to accomplish certain macroeconomic policies. Monetary policy is a supply-side macroeconomic policy that supervises the growth rate and money supply in the economy.
Monetary Economics
As from the name, it is very evident that monetary economics deals with the monetary theory of economics. Therefore, we can say that monetary economics, is that part of economics that provides us with the idea or notion of analyzing money as a holding with its function, which acts as the medium of exchange, the store of value through which the buying and selling are done and also the unit of account. It also helps in formulating the framework of the monetary policy of a bank in an economy which ultimately results in the welfare of the people residing in that particular economy. The monetary policy of an economy also helps to analyze and evaluate the financial health of it.
Step by step
Solved in 2 steps with 1 images
