Suppose the federal funds rate is not close to zero, risk spreads are roughly constant so that different interest rates rise and fall together, and banks are not holding many excess reserves. Federal Reserve open-market operations are done mostly in Treasury bills. Such economic conditions are referred to as “normal times.” Part A: Suppose the Federal Reserve implements an expansionary monetary policy by _______ (buying or selling) bonds through open-market operations. The following graph shows the demand and supply of bank reserves. On the graph, show the effect of the Fed's expansionary monetary policy by shifting one or both of the curves. As a result of the Fed's expansionary policy, the interest rate _______ (falls or rises) to ______(10%, 6%, 2%, 12%, 8%, 4%) Part B. Investment is one component of total spending. The following graph shows the demand for investment. Use the information from the previous graph to show the short-run effect of the Fed's expansionary monetary policy by shifting the demand curve or moving the point along the curve on the following graph. As a result of the Fed's expansionary policy, the quantity of investment demanded ______(falls, rises) to $___________ (fill in blank) billion Part C. The following graph shows the aggregate demand (AD) curve in the goods and services market before the Fed implements its expansionary policy. Suppose that the multiplier in this economy is 2. On the following graph, show the effect of the change in investment demand on the AD curve once the multiplier process has run its course. Use the green curve (triangle symbol) to plot the new AD curve at price levels of 40 and 140. Hint: Use the new quantity of investment demanded you found in the Market for Investment and the multiplier to determine the exact change in aggregate demand at both price levels. Assume that this effect is independent of the price level, that is, the AD curve has a parallel shift. An expansionary monetary policy causes the quantity of bank reserves in the economy to __________(decrease, increase), which drives interest rates ___ (down or up). As a result, businesses invest ______ (less or more) in capital improvements such as new factories and equipment. This leads to __________ (a decrease, an increase) in aggregate demand, the extent of which is determined by the simple spending multiplier.

Suppose the federal funds rate is not close to zero, risk spreads are roughly constant so that different interest rates rise and fall together, and banks are not holding many excess reserves. Federal Reserve open-market operations are done mostly in Treasury bills. Such economic conditions are referred to as “normal times.” Part A: Suppose the Federal Reserve implements an expansionary monetary policy by ___ (buying or selling) bonds through open-market operations. The following graph shows the demand and supply of bank reserves. On the graph, show the effect of the Fed's expansionary monetary policy by shifting one or both of the curves. As a result of the Fed's expansionary policy, the interest rate _ (falls or rises) to (10%, 6%, 2%, 12%, 8%, 4%) Part B. Investment is one component of total spending. The following graph shows the demand for investment. Use the information from the previous graph to show the short-run effect of the Fed's expansionary monetary policy by shifting the demand curve or moving the point along the curve on the following graph. As a result of the Fed's expansionary policy, the quantity of investment demanded (falls, rises) to $_ (fill in blank) billion Part C. The following graph shows the aggregate demand (AD) curve in the goods and services market before the Fed implements its expansionary policy. Suppose that the multiplier in this economy is 2. On the following graph, show the effect of the change in investment demand on the AD curve once the multiplier process has run its course. Use the green curve (triangle symbol) to plot the new AD curve at price levels of 40 and 140. Hint: Use the new quantity of investment demanded you found in the Market for Investment and the multiplier to determine the exact change in aggregate demand at both price levels. Assume that this effect is independent of the price level, that is, the AD curve has a parallel shift. An expansionary monetary policy causes the quantity of bank reserves in the economy to (decrease, increase), which drives interest rates _ (down or up). As a result, businesses invest (less or more) in capital improvements such as new factories and equipment. This leads to ____ (a decrease, an increase) in aggregate demand, the extent of which is determined by the simple spending multiplier.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Part A: Suppose the Federal Reserve implements an expansionary monetary policy by _______ (buying or selling) bonds through open-market operations.

The following graph shows the demand and supply of bank reserves.

On the graph, show the effect of the Fed's expansionary monetary policy by shifting one or both of the curves.

As a result of the Fed's expansionary policy, the interest rate _______ (falls or rises) to ______(10%, 6%, 2%, 12%, 8%, 4%)

Part B.

Investment is one component of total spending. The following graph shows the demand for investment.

Use the information from the previous graph to show the short-run effect of the Fed's expansionary monetary policy by shifting the demand curve or moving the point along the curve on the following graph.

As a result of the Fed's expansionary policy, the quantity of investment demanded ______(falls, rises) to $___________ (fill in blank) billion

Part C.

The following graph shows the aggregate demand (AD) curve in the goods and services market before the Fed implements its expansionary policy. Suppose that the multiplier in this economy is 2.

On the following graph, show the effect of the change in investment demand on the AD curve once the multiplier process has run its course. Use the green curve (triangle symbol) to plot the new AD curve at price levels of 40 and 140.

Hint: Use the new quantity of investment demanded you found in the Market for Investment and the multiplier to determine the exact change in aggregate demand at both price levels. Assume that this effect is independent of the price level, that is, the AD curve has a parallel shift.

An expansionary monetary policy causes the quantity of bank reserves in the economy to __________(decrease, increase), which drives interest rates ___ (down or up). As a result, businesses invest ______ (less or more) in capital improvements such as new factories and equipment. This leads to __________ (a decrease, an increase) in aggregate demand, the extent of which is determined by the simple spending multiplier.

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Part A
The Market for Bank Reserves
12
Supply
10
Demand
Supply
Demand
2
300
600
900
1200
1500
1800
QUANTITY OF BANK RESERVES (Billions of Dollars)
Hint: Be sure the new interest rate corresponds to the interest rate you found in the previous graph.
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Part B
The Market for Investment
12
10
Demand for Investment
Demand for Investment
2
30
60
90
120
150
180
INVESTMENT (Billions of Dollars)
Part C
(?
The Market for Goods and Services
160
140
New AD
120
100
80
60
40
AD
20
60
120
180
240
300
360
420
480
REAL GDP (Billions of Dollars)
INTEREST RATE (Percent)
NOMINAL INTEREST RATE (Percent)
PRICE LEVEL

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