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Chapter 16: Q.21 - Problems (page 370)

Consider figure 16.3, Discuss a policy action that trading desk at the federal reserve bank of New York could undertake in order to generate the decrease in aggregate demand displayed in this figure

Short Answer

Expert verified

The desk should sell government securities in open market operations, to generate decrease in aggregate demand

Step by step solution

01

Aggregate Demand Concept 

Aggregate Demand includes the sum total value of all final commodities & services, which are planned to be bought by all the sectors of an economy.

  • AD is positive related to level of money supply in the economy. Higher money supply means more AD & lower money supply means less AD
02

FOMC Concept 

Federal Open Market Operations is defined as buying & selling of government securities in open market. It is used as a monetary (quantitative) tool to regulate Aggregate Demand

  • Central bank tends to buy securities (giving commercial banks & public cash) - for increasing money supply, AD in the economy.
  • Central bank prefer selling securities (to get cash from commercial banks & public) - to reduce money supply, AD in economy

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Most popular questions from this chapter

Understand the equation of exchange and its importance in the quantity theory of money and prices.

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.

Take a look at Figure 16-6. Suppose that a multiple reduction in GDP is the final outcome that the Fed desires in the last box in the figure. Explain the required directions of efforts - that increases or decreases - that most occur in the preceding boxes in the figure in order to yield in this desired decrease in real GDP

Take a look at Figure 16-3. Discuss a policy action that the Trading Desk at Federal Reserve Bank of New York could undertake in order to bring about the increase in aggregate demand displayed in the figure

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) ?
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