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Chapter 16: Q.13 (page 369)

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.

Short Answer

Expert verified

It would result in a lowering of real GDP.

Step by step solution

01

introduction

The Fed can utilize the arrangement apparatuses of the open market activities, changes in the save proportion and the given rebate rate change.

02

explanation

If the Fed practices every one of the three arrangements like selling securities in the open market, after which expanding the discount rate alongside the expansions in the save proportion occurs, then it would bring about the bringing down of the genuine GDP. This is because of the way that it would bring about exorbitant financing costs bringing about an expansion in the inflow of global capital after which it would affect the dollar rate to increment and immediately a reduction in sends out at last prompting bringing down of genuine GDP.

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Most popular questions from this chapter

You learned in an earlier chapter that if there is an inflationary gap in the short run, then in the long run a new equilibrium arises when input prices and expectations adjust upward, causing the short-run aggregate supply curve to shift upward and to the left and pushing equilibrium real GDP per year back to its long-run value. In this chapter, however, you learned that the Federal Reserve can eliminate an inflationary gap in the short run by undertaking a policy action that reduces aggregate demand.

a. Propose one monetary policy action that could eliminate an inflationary gap in the short run.

b. In what way might society gain if the Fed implements the policy you have proposed instead of simply permitting long-run adjustments to take place?

Assume that the following conditions exist :

a. All banks are fully loaned up - there are no excess reserves, and desired excess reserves are always zero.

b. The money multiplier is 4.

c. The planned investment schedule is such that at a 4percent rate of interest, investment is \(1400billion. At 5percent, investment is \)1380billion.

d. The investment multiplier is 5.

e. The initial equilibrium level of real GDP is \(19trillion.

f. The equilibrium rate of interest is 4percent.

Now the Fed engages in contractionary monetary policy. It sells \)2billion worth of bonds, which reduces the money supply, which in turn raises the market rate of interest by 1 percentage point. Determine how much the money supply must have decreased, and then trace out numerical consequences of the associated increase in interest rates on all other variables mentioned.

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

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.

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?
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