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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 increase in the equilibrium interest rate induces a \(5billion decrease in real planned investment spending by businesses. In addition, the investment multiplier is equal to 4, and the money multiplier is equal to 3. Furthermore, every \)9billion decrease in money supply brings about 0.1-percentage-point increase 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 decrease if the Federal Reserve desires to bring about an $80billion decrease in equilibrium real GDP ?

b. How much must the 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) ?

Explain why the net export effect of a contractionary monetary policy reinforces the usual impact that monetary policy has on equilibrium real GDP per year in the short run.

Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all of its policy instruments except interest on reserves, what should the Fed do with its policy tools?

If the FOMC were to aim to attain targets for M1 or M2 instead of the federal funds rate, would people be as concerned with trying to anticipate future federal funds rate changes? Explain.

Explain how the Federal Reserve has implemented a credit policy since 2008.
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