Question

If the Federal Reserve engages in expansionary monetary policy:

1. What will be the effect on money demand, money supply, and interest rates? Please explain.
2. What will be the effect on planned investment, AE, and GDP? Please explain
3. In the short-run: What will be the effect on AD and SRAS? What will be the effect on prices? Please explain.

Answer 1

--->Expansionary monetary policy(EMP) involves the following actions of central bank -- Lowering interest rates, purchasing government securities or reducing reserve ratio.

--> EMP is when a central bank uses its tools to stimulate the economy. That increases the money supply, lowers interest rates, and increases aggregate demand, lowers the value of the currency, thereby decreasing the exchange rate.

-->As there will be more money in the economy,firm's borrow more,hire workers,create jobs and thus increasing investment and giving big boost to overall economic growth.

--> The increase in the money supply is correlated with increase in nominal output, or Gross Domestic Product (GDP). In addition, the increase in the money supply will lead to an increase in consumer spending. This increase will shift the aggregate demand curve to the right. In addition, the increase in money supply would lead to movement up along the aggregate supply curve. This would lead to a higher prices and more potential real output.