6. An economy is facing a recessionary gap and the Federal Reserve decides to engage in...

6. An economy is facing a recessionary gap and the Federal Reserve decides to engage in expansionary monetary policy. What are the three tools that the Federal Reserve can use to get the money supply to grow and what direction should each take?

Expert Solution

The federal reserve can use the following tools as a part of expansionary monetary policy

It can decrease the reserve requirement. depository institutions are required to keep a fixed fraction of their deposits as required reserves with the Fed. When this requirement is decreased this implies that banks are now equipped with additional reserves which can be used in generation of loans. This increases money supply and reduces the rate of interest. As a result investment demand increases and this increases aggregate.
Federal reserve can decrease the discount rate. This is the rate of interest charged on the loans provided by the federal reserve to depository institutions. Again when this is reduced depository institutions are encouraged to take more such loans and increase their reserves. Once again the money supply is increased and rate of interest is decreased. Investment and aggregate demand increase
federal reserve can engage in open market purchase of government securities which will help a depository institutions in increasing excess reserves. As the money supply is increased and rate of interest is reduced aggregate demand is increased.

Rahul Sunny answered 2 years ago

5. Draw an AD-AS diagram for an economy which is facing a recessionary gap. a) To...

5. Draw an AD-AS diagram for an economy which is facing a recessionary gap. a) To eliminate the gap, should the central bank use expansionary or contractionary monetary policy? b) Explain how the interest rate, investment spending, consumer spending, real GDP, and the aggregate price level will change as monetary policy closes the recessionary gap. C) Draw an AD-AS diagram for an economy which is facing an inflationary gap. D)To eliminate the gap, should the central bank use expansionary or...

The economy is in a recession and the recessionary gap is large. Describe the discretionary and...

The economy is in a recession and the recessionary gap is large. Describe the discretionary and automatic fiscal policy actions that might occur. Discretionary fiscal policy that might occur is ______. Automatic fiscal policy that might occur is ______. A. a decrease in transfer payments and an increase in taxes with no interference by Parliament; a decrease in government expenditure and an increase in taxes by a decision of Parliament B. a decrease in government expenditure and an increase in...

Monetary Policy 1. If the economy is operating below full employment, should the Federal Reserve engage...

Monetary Policy 1. If the economy is operating below full employment, should the Federal Reserve engage in expansionary or contractionary monetary policy to bring the economy back to full employment? 2. When the economy has a positive GDP gap, then potential output exceeds actual output potential output equals actual output potential output is less than actual output There is not enough information. 3. If the economy has a positive GDP gap, should the Federal Reserve engage in expansionary or contractionary...

The economy is in a recessionary gap. a) Describe the appropriate monetary policy and the steps...

The economy is in a recessionary gap. a) Describe the appropriate monetary policy and the steps the Bank of Canada takes. b) Draw the AS-AD model, starting in a recessionary gap. Show the effect of the appropriate monetary policy on the diagram. What happens to real GDP, unemployment, and inflation?

Explain the following two cases of self- regulating economy: Inflationary gap and recessionary gap . Discuss...

Explain the following two cases of self- regulating economy: Inflationary gap and recessionary gap . Discuss the Govt policy implication for each case.

Suppose that the federal government has identified a recessionary gap of $250 billion. If they decide...

Suppose that the federal government has identified a recessionary gap of $250 billion. If they decide to use fiscal policy, what type of fiscal policy should they adopt? Calculate both of their options (and be specific about direction) considering that the MPC = 0.75.

Question 1: Fiscal Policy Suppose the economy is in a recessionary gap, and the government reponds...

Question 1: Fiscal Policy Suppose the economy is in a recessionary gap, and the government reponds by conducting an expansionary fiscal policy. a. What are the three fiscal policy options available to the government in its attempt to close the recessionary gap? b. Suppose the marginal propensity to consume is 0.75. Calculate the effect of a $1,000 increase in government purchases on real GDP, and then calculate the effect of a $1,000 tax cut on real GDP. Why does a...

Suppose an economy is experiencing higher inflation rate as well as a recessionary gap. Using the...

Suppose an economy is experiencing higher inflation rate as well as a recessionary gap. Using the policy reaction function, explain whether the Reserve bank will increase or decrease the interest rate?

Is a recessionary or inflationary gap bad for an economy? Have you ever wondered how the...

Is a recessionary or inflationary gap bad for an economy? Have you ever wondered how the federal government and the Federal Reserve react to smooth out recessionary and inflationary gaps? In this activity, you will explore the concepts of fiscal policy and the attempts the U.S. government takes when the U.S. economy is in a recessionary or inflation gap. You will discuss the concepts of aggregate supply and aggregate demand to determine how the U.S. economy can work its way...

Assume that the economy has just suffered a recessionary gap due to a dramatic drop in...

Assume that the economy has just suffered a recessionary gap due to a dramatic drop in consumer confidence as new of trade negotiations with China deteriorate. Charting the decline the consumer purchases and business investment, the aggregate demand curve has shifted to the left by $700 billion dollars. As a newly hired economist and assistant to the Chairman of the Federal Reserve Bank, you are tasked with the responsibility to present an action plan using the tools of monetary policy....

Question