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(Monetary Policy and an Expansionary Gap) Suppose the Fed wishes to use monetary policy to close an expansionary gap.

a. Should the Fed increase or decrease the money supply?

b. If the Fed uses open-market operations, should it buy or sell government securities?

c. 10. Determine whether each of the following increases decreases, or remains unchanged in the short run: the market interest rate, the quantity of money demanded, investment spending, aggregate demand, potential output, the price level, and equilibrium real GDP.

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019

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Related questions

(Monetary Policy and an Expansionary Gap) Suppose the Fed wishes to use monetary policy to close an expansionary gap.
a. Should the Fed increase or decrease the money supply?
b. If the Fed uses open-market operations, should it buy or sell government securities?
c. 10. Determine whether each of the following increases decreases, or remains unchanged in the short run: the market interest rate, the quantity of money demanded, investment spending, aggregate demand, potential output, the price level, and equilibrium real GDP

In an effort to move the economy out of a recession, the federal government would engage in expansionary economic policies. Respond to the following points in your paper on the actions the government would take to address expansionary fiscal and monetary policies:

Expansionary Fiscal Policy:

Explain the actions the federal government would take while engaging in expansionary fiscal policy in terms of the following:

The necessary change in taxes and government spending,

The effect on aggregate demand, GDP, and employment.

Expansionary Monetary Policy:

The three tools the Federal Reserve Bank (The Fed) uses when conducting monetary policy are the required reserve ratio, the discount rate, and open market operations.

Explain the actions of the Fed in regard to the three tools.

When the required reserve ratio is increased or decreased

When the discount rate is increased or decreased

Buying or selling government securities when conducting expansionary monetary policy

Explain how these actions would affect the money supply, interest rates, spending, aggregate demand, GDP, and employment.

1. A restrictive monetary policy by the Fed should lead to:

A. A decrease in investment and an increase in aggregate demand.

B. Leave investment unchanged but decrease aggregate demand.

C. An increase in investment and an increase in aggregate demand.

D. A decrease in investment and a decrease in aggregate demand.

2. When the Federal Reserve uses open market operations (OMO) in an expansionary monetary policy:

A. The Fed will purchase stocks from banks, increasing the monetary base.

B. The Fed will buy bonds from banks, increasing bank reserves and increasing the monetary base.

C.The Fed will lower taxes and increase government spending.

D. The Fed will decrease the discount rate, decreasing the monetary base.

3. A primary goal of monetary policy is to:

A. Eliminate trade barriers from other nations.

B. Maintain high interest rates.

C. Reduce the size of the banking sector.

D. Prevent high rates of inflation.

4. The major tools of monetary policy available to the Federal Reserve System involve:

A. Reserve requirements and tax policy.

B. Reserve requirements and open-market operations.

C. The discount rate and exchange rates.

D. Open-market operations and changing government spending,

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