Suppose the that the Central Bank decides to buy back more assets through open market operations....

Suppose the that the Central Bank decides to buy back more assets through open market operations. Would this policy aim to stimulate or contract the economy? In addition, would interest rates be affected? Make sure to include in your answer a description of how changes in interest rates affects the supply and demand of interest-earning assets.

Solutions

Expert Solution

If the central bank wants to buy back more assets through open market operations,its using a cheap ( expansionary) monentary policy to facilitate economic expansion.

An expansionary monetary policy aims to increase money supply in an economy. When central bank purchases assets, there is a transfer of money from central bank to the sellers of assets . Result is an rise in money supply in the economy.

This transaction also has an another side.Open market purchased by the central bank rises bond prices . There is an inverse relationship between interest rates and bond prices. Rise in bond prices leads to a fall in in interest rates.

When interest rates fall credit becomes cheaper. Consumption and investment activities based on borrowed credit increases in the economy. Consumption and investment are important components of aggregate demand. Higher consumption and investment results in an increase in aggregate demand. Production in the economy rises so that aggregate supply is matched with aggregate demand. All these activities together set the economy on the path of economic expansion.

Rahul Sunny answered 2 years ago

Next > < Previous

Related Solutions

1) How does the central bank control the money supply through open market operations? Explain. For...

1) How does the central bank control the money supply through open market operations? Explain. For this question, you need to say what exactly open market operations are and how they affect the monetary base through affecting reserves. You may want to provide one example for this question (eg. an open market purchase or sale). Ideally, to get full marks you would also briefly mention how the monetary base affects the money supply through the money multiplier. You don’t need...

Provide details about a central bank’s open market operations. Why are open market operations more advantageous...

Provide details about a central bank’s open market operations. Why are open market operations more advantageous than other tools of monetary policy

Suppose the Central Bank conducts an open market purchase. a) Show the effects of this on...

Suppose the Central Bank conducts an open market purchase. a) Show the effects of this on the bond market and money market by drawing a supply and demand diagram for each. Assume the liquidity effect is the only effect. b) Looking at your diagram, immediately after the open market purchase (i.e. after the shifts you drew in the diagram but before the markets are at the new equilibria) would there be excess demand or excess supply in the money market...

Suppose the central bank conducts an unusually large open market purchase of bonds held by the...

Suppose the central bank conducts an unusually large open market purchase of bonds held by the First National Bank of $1400 billion due to a sharp contraction in the economy. Before the First National Bank turns proceeds to productive uses, update the balance sheet of the First National Bank

If the central bank of Toyoashihara decides to increase money supply substantially by increasing its open...

If the central bank of Toyoashihara decides to increase money supply substantially by increasing its open market purchases, answer the following questions regarding Toyoashihara’s economy. a) Describe the impact of these open market purchases in Toyoashihara’s money market. b) Use the AS-AD diagram to show the impact of the increased money supply on the Toyoashihara economy in the short run (label the short run ESR). Show initial position, all curve shifts, and explain. c) Explain what will happen to bring...

Provide details about a central bank’s open market operations.

Provide details about a central bank’s open market operations. Why are open market operations more advantageous than other tools of monetary policy?

Suppose in an economy which is producing at its potential output, the central bank decides to...

Suppose in an economy which is producing at its potential output, the central bank decides to implement an expansionary monetary policy. Using the AD-AS model, explain the effect that this policy will have in the short run, and in the long run. Illustrate your answer with a diagram.

QUESTION 1 Open market operations are conducted through the Washington D.C. Federal Reserve Bank. True False...

QUESTION 1 Open market operations are conducted through the Washington D.C. Federal Reserve Bank. True False QUESTION 2 In a system of free banking, a bank’s ability to expand credit is limited by the trust the public has in the redemption of their bank notes. True False 1 points 1 points QUESTION 3 Bank reserves tend to move in the same direction as the public’s demand to hold cash (i.e., they both go up together or they both...

Suppose a central bank decides it is appropriate to increase its policy interest rate in order...

Suppose a central bank decides it is appropriate to increase its policy interest rate in order to increase rates more generally throughout the economy. In the contex of the money market , if the money demand function is stable ,explain how the change in policy would be reflected in the money supply. Suppose the economy is a closed one. What effect will there be on investment, on aggregate expenditure? Include diagrams in your answer. What additional effect will there be...

An open market sale of US Treasury bonds by the central bank will ________ credit conditions...

An open market sale of US Treasury bonds by the central bank will ________ credit conditions for private firms. A. ease B. restrict C. not change

Subjects