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Chapter 16: Q.23 - Problems (page 370)

Consider figure 16-7. Discuss a specific monetary policy action that Fed's Trading Desk could implement in order to induce the effects traced out by this figure.

Short Answer

Expert verified

The figure depicting final increase in Aggregate Demand can be done by buying securities in Federal open market operations.

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

  • Central bank buys securities (giving commercial banks & public cash) - to increase money supply in the economy. It decreases the interest rate and increases investment demand, the Aggregate Demand further & shifts it rightwards.

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Most popular questions from this chapter

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

Why might the fact that private economic forecasters compete to sell their services help to constrain behavioural tendencies for too much optimism in projections of real GDP growth? Explain your reasoning.

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?

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

Suppose that the Fed implements each of the policy changes you discussed in Problem 16-12. Now explain how the net export effect resulting from these monetary policy actions will reinforce their effects that operate through interest rate changes.
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