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Chapter 16: Q.16.3 Learning Objectives (page 349)

Evaluate how expansionary and contractionary monetary policy actions affect equilibrium real GDP and the price level in the short run.

Short Answer

Expert verified

Expansionary and contractionary monetary policy actions affect equilibrium real GDP and the price level in the short run by making GDP high and reducing it respectively.

Step by step solution

01

introduction

Monetary policy that lessens loan costs and animates acquiring is known as Expansionary and Monetary policy that increments financing costs and diminishes acquiring in the economy is contractionary.

02

explanation

Contractionary monetary policy prompts interest rates to rise because of which the number of loanable assets will be diminished. This will influence two parts of total interest.

The expansionary monetary policy prompts interest rates to lessen because of which the number of loanable assets will increment. This will influence two parts of total interest.

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Most popular questions from this chapter

Suppose that each 0.1percentage point decrease in the equilibrium interest rate induces a \(10billion increase in real planned investment spending by businesses. In addition, the investment multiplier is equal to 5, and the money multiplier is equal to 4. Furthermore, every \)20billion increase in money supply brings about 0.1percentage point reduction in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal.

a. How much must real planned investment increase if the Federal Reserve desires to bring about a $100billion increase in equilibrium real GDP ?

b. How much must he money supply change for the Fed to induce the change in real planned investment calculated in part (a) ?

c. What dollar amount of open market operations must the Fed undertake to bring about the money supply change calculated in part (b) ?

Let's denote the price of a non-maturing bond (called a consol) as Pb. The equation that indicates this price is Pb=Ir, where I is the annual net income the bond generates and r is the nominal market interest rate.

a. Suppose that a bond promises the holder 500$ per year forever. If the nominal market interest rate is 5 per cent, what is the bond's current price?

b. What happens to the bond's price if the market interest rate rises to 10 per cent?

What do you think might be lost-and by whom - if the Fed were to follow an easily understood rule as a guide for conducting monetary policy? Explain.

Suppose that the economy currently is in long-run equilibrium. Explain the short- and long-run adjustments that will take place in an aggregate demand-aggregate supply diagram if the Fed expands the quantity of money in circulation.

Describe how Federal Reserve monetary policy actions influence market interest rates
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