Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 34.1, Problem 1QQ
To determine
Liquidity preference theory, interest rate, and aggregate demand.
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An increase in the interest rate discourages private firms from making new investments in factories. How does the sensitivity of investment to changes in the interest rate affect the amount by which monetary policy influences aggregate-demand?
If the Federal Reserve wants to keep aggregate demand (i.e. spending growth) stable, what will it do to the growth rate of money supply when a lot of good news comes out about the economy increase it, decrease it, or leave it unchanged? Explain your answer.
Chapter 34 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- Economics Suppose that a large bank borrowed $1 billion from the Federal Reserve for one week. How would this change the monetary base? If the Federal Reserve did not want the monetary base to change, what would it do? Explain your reasoning.arrow_forwardIf the economy is able to self-correct from a negative GDP gap, why might the Fed wish to intervene in the market?arrow_forwardSuppose there is an increase in money demand because of a stock market boom that raises people’s wealth. Draw the money market model to show the stock market boom impact on the interest rate. Will investment and consumption increase or decrease because of this event? What should Fed do if it wants to maintain the original interest rate? Show the impact of the Fed’s action in the graph of part a. Will investment and consumption still change if the Fed takes its action?arrow_forward
- An increase in the money supply will shift aggregate demand to the left. TRUE OR FALSE?arrow_forward“Monetary policy is the macroeconomic policy laid down by the central bank of an economy.”In terms of the above statement, explain how monetary policy can be used to combat inflationarrow_forwardWhich of the following is true for monetary policy? Select one: a. As a contractionary monetary policy, the Bank of Canada can increase the target for the overnight rate. b. As an expansionary monetary policy, the central bank can buy bonds from the public to reduce a inflationary gap. c. The central bank can sell bonds during an economic downturn in order to stabilize the economy. d. The central bank can use open market operations to change the target for the overnight rate.arrow_forward
- what is the reason why monetary policy cannot keep GDP above its full-employment level for an extended period of time? options: fiscal policy will not allow this type of monetary policy to continue nominal wage expectations will eventually adjust to reflect monetary policy induced inflation restaurants will stop raising prices the unemployed will eventually protestarrow_forwardDraw a correctly labeled graph of the country’s reserve market, and show how the central bank’s action to move the economy toward its long-run equilibrium affects the policy rate in the short runarrow_forwardHello, I need help with a macroeconomics question. Thank you in advance! The answers are based on a short exerpt from the Federal Reserves press release from Feb 1, 2023 (attatchde below). 7. What do you expect to happen to the money supply? 8. What do you expect to happen to the inflation rate? 9. How would you expect all these decisions to affect employment in the economy? 10. How do the effects you found on 8 and 9 align with what the Fed was hoping to attain?arrow_forward
- Changes to both the money supply and the velocity of money include changes in aggregate demand. However, the long-run impacts of changes in these variables are different. How are the effects of an increase in the velocity of money and the effects of an increase in the money supply different?arrow_forwardHow does the federal government reduce interest rate? What happens to interest rate and quantity of money as a result of expansionary monetary policy? Please explain using a diagram of interest rates vs quantity of money. showing the relevant shifts in the supply and demand curve.arrow_forwardWhat is an open market operation? How can a central bank adopt an openmarket operation to increase the growth rate of her money supply? Usingrelevant Classical Theories, explain the long run effects on the inflation rateand nominal interest rate.arrow_forward
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