You are a member of the Council of Economic Advisers for the Central Bank in the country of Kumbara. Currently the economy of Kumbara is feeling the impacts of the crisis in the nation of Moolah, a major trade partner. Kumbara's GDP is currently at $370b and is estimates show that Kumbara's economy has the capacity to produce $400b. The president of Kumbara does not wants to change taxes or government spending. The reserve requirement ratio in Kumbara is 10%. Prepare a brief report that answers the following questions: 1. The head of the central bank favors immediate action, and wants you put together a monetary policy response. Which monetary policy action would you recommend (expansionary or contractionary)? Explain your rationale with words. 2. Estimates show that to close the output gap, the money supply should increase by $500M. Using the potential money multiplier how much worth of bonds should the Central Bank buy or sell? In other words, based on the policy you propose, the Central Bank would either buy bonds or sell bonds, what should be the total dollar amount of this transaction? Explain your rationale with numbers. 3. Based on the policy action you are recommending, what would be the impact on the desire to save, the desire to spend, unemployment and inflation. Explain your rationale with words. 4. Thinking outside of your role as a member of the Council of Economic Advisers for the Central Bank, what is your take on expansionary monetary policy? Do you favor it? Are you against? In your view, what are the pros and cons? Explain your rationale.
You are a member of the Council of Economic Advisers for the Central Bank in the country of Kumbara. Currently the economy of Kumbara is feeling the impacts of the crisis in the nation of Moolah, a major trade partner. Kumbara's GDP is currently at $370b and is estimates show that Kumbara's economy has the capacity to produce $400b. The president of Kumbara does not wants to change taxes or government spending. The reserve requirement ratio in Kumbara is 10%. Prepare a brief report that answers the following questions: 1. The head of the central bank favors immediate action, and wants you put together a monetary policy response. Which monetary policy action would you recommend (expansionary or contractionary)? Explain your rationale with words. 2. Estimates show that to close the output gap, the money supply should increase by $500M. Using the potential money multiplier how much worth of bonds should the Central Bank buy or sell? In other words, based on the policy you propose, the Central Bank would either buy bonds or sell bonds, what should be the total dollar amount of this transaction? Explain your rationale with numbers. 3. Based on the policy action you are recommending, what would be the impact on the desire to save, the desire to spend, unemployment and inflation. Explain your rationale with words. 4. Thinking outside of your role as a member of the Council of Economic Advisers for the Central Bank, what is your take on expansionary monetary policy? Do you favor it? Are you against? In your view, what are the pros and cons? Explain your rationale.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:You are a member of the Council of Economic Advisers for the Central Bank in the country of Kumbara.
Currently the economy of Kumbara is feeling the impacts of the crisis in the nation of Moolah, a major
trade partner. Kumbara's GDP is currently at $370b and is estimates show that Kumbara's economy has the
capacity to produce $400b. The president of Kumbara does not wants to change taxes or government
spending. The reserve requirement ratio in Kumbara is 10%. Prepare a brief report that answers the
following questions:
1. The head of the central bank favors immediate action, and wants you put together a monetary policy
response. Which monetary policy action would you recommend (expansionary or contractionary)?
Explain your rationale with words.
2. Estimates show that to close the output gap, the money supply should increase by $500M. Using the
potential money multiplier how much worth of bonds should the Central Bank buy or sell? In other
words, based on the policy you propose, the Central Bank would either buy bonds or sell bonds, what
should be the total dollar amount of this transaction? Explain your rationale with numbers.
3. Based on the policy action you are recommending, what would be the impact on the desire to save, the
desire to spend, unemployment and inflation. Explain your rationale with words.
4. Thinking outside of your role as a member of the Council of Economic Advisers for the Central Bank, what
is your take on expansionary monetary policy? Do you favor it? Are you against? In your view, what are
the pros and cons? Explain your rationale.
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