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Under what economic conditions would the Fed wish to increase (expansionary policy) or decrease (contractionary policy) the money supply? How would an increase in the money supply likely affect interest rates, investment, aggregate demand, the price level, output, and employment? Why might monetary policy fail? What does inflation targetingmean?

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019
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Related questions

The Federal Reserve may increase or decrease the money supply depending on the economic condition.

What policy instruments does the Fed use for the monetary policy?

What are the pros and cons of using expansionary and contractionary monetary policy tools under the following scenarios: depression, recession, inflation, and robust economic growth? Which do you think is more appropriate today?

Question 16 (3 points) An expansionary monetary policy by the Fed should lead to: 

A decrease in investment and a decrease in aggregate demand. Leave investment unchanged but decrease aggregate demand.

An increase in investment and an increase in aggregate demand.

An increase in investment and a decrease in aggregate demand.

 

Question 17 (3 points) Federal Reserve policy may have little impact on aggregate demand if:

Exchange rates do not respond to a change in market interest rates.

Investment by firms fails to respond to lower interest rates.

Banks meet their reserve requirements.

People fail to spend the extra money they receive when the Fed cuts taxes.

 

Question 18 (3 points) A liquidity trap is said to exist when a change in monetary policy has no effect on:

The supply of government bonds.

The natural level of employment

Aggregate supply.

Interest rates.

 

Question 19 (3 points) Because of the problem of lags, monetary authorities should probably respond to conditions:

Expected to exist in the future.

Immediately as they arise.

In the recent past.

Based on past statistics.

(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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