Draw graphs (4) to show contractionary monetary policy (policy to reduce GDP), and describe what happens...

Draw graphs (4) to show contractionary monetary policy (policy to reduce GDP), and describe what happens in each graph.

Expert Solution

Contractionary monetary policy emplies reducing the money supply in the economy.A reduction in money supply shifts the LM curve leftwards thus leading to a rise in interest rates.A rise in interest rates in turn reduces the level of investment in the economy thus shifting the AD curve leftwards resulting in a decrease in overall spending level as investment is one of the components of spending.Thus as a result of this the overall output level or real GDP level and overall price in the economy falls.

In the diagram below the the decline in money supply shifts the LM curve from LM to LM^' resulting in a rise in interest rates.This leads to a fall in investment spending thus causing the AD to shift leftwards from AD to AD^' resulting in a lower level of equilibrium real GDP and price level.

Rahul Sunny answered 2 years ago

Draw graphs to show contractionary monetary policy(policy to reduce GDP), and describe happens in each graphs

1. With the aid of graphs explain the effect of contractionary monetary policy on the level...

1. With the aid of graphs explain the effect of contractionary monetary policy on the level of output, prices, and interest rates for (i) the Keynesian AS-curve case, (ii) the classical AS-curve case, and (iii) the intermediate case. 2. Use the AD/AS graphical framework to show the effect of expansionary fiscal policy on the level of output, prices and the interest rate in the short run and the long run

explain the expansionary and contractionary monetary policy graphs as to how an increase in the cash...

explain the expansionary and contractionary monetary policy graphs as to how an increase in the cash rate from 1 % to 1.5% would help to keep inflation within the target rate, and how a further decrease from 1% to 0.75 % in the cash rate would help to stimulate the economy. Describe the circumstances in which the RBA Board might decrease and/or increase the cash rate in the future

Explain Monetary and Fiscal Policies. a) How does contractionary monetary policy works? Explain by graphs (...

Explain Monetary and Fiscal Policies. a) How does contractionary monetary policy works? Explain by graphs ( interest rate, exchange rate, consumption, import, export) b) How does expansionary fiscal policy works? Explain by graphs. ( interest rate, exchange rate, consumption, import, export)

Using words and graphs analyze the macroeconomic effects of contractionary monetary policy in the short run....

Using words and graphs analyze the macroeconomic effects of contractionary monetary policy in the short run. Provide as much detail as possible.

2. If the Fed orders a contractionary monetary policy, describe what will happen to the following...

2. If the Fed orders a contractionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy: (35 points) a. The money supply b. Interest rates c. Investment d. Consumption e. Net Exports f. The aggregate demand curve g. Real GDP Please give an answer for all of them!! Thank you.

Monetary Policy: There are two types of Monetary policies: Expansionary monetary policy and contractionary monetary policy....

Monetary Policy: There are two types of Monetary policies: Expansionary monetary policy and contractionary monetary policy. Key-Questions: 1. Explain each of the key terms in not more than one or two sentences (give formula or examples whichever is applicable): (a) Overnight rate of interest (b) Bank rate (c) Money multiplier (d) open market operations. 2. Discuss about the impact of each policy on the supply of money and inflation with suitable explanation and example. 3. Give a graphical explanation of...

Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation...

Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation rate. True or False: If wage contracts have short duration, it would make the recession induced by contractionary monetary policy more severe. True False A recession induced by contractionary monetary policy will be more severe if there is confidence in the Fed's determination to reduce inflation. True or False: If expectations of inflation adjust quickly to actual inflation, it would make the recession induced...

5. a) What, exactly, is “contractionary” monetary policy? Please describe each of the 5 steps of...

5. a) What, exactly, is “contractionary” monetary policy? Please describe each of the 5 steps of contractionary monetary policy. 5.b) It has been argued that ‘contractionary’ monetary policy is “stronger” than ‘expansionary’ monetary policy. How may this be true? 6. What is the “Fed”, exactly? 7. Why is it that many economists argue that the Fed may ASK the U.S. banking system to EXPAND the supply of loans, but the Fed may FORCE the U.S. banking system to CONTRACT the...

MONETARY POLICY This question explores the role of expansionary and contractionary monetary policy in the aggregate...

MONETARY POLICY This question explores the role of expansionary and contractionary monetary policy in the aggregate demand and aggregate supply model. You will use schedules for an aggregate demand line and an aggregate supply line to identify the equilibrium price level and real GDP in a macroeconomy. Additionally, you will compare the short-run equilibrium level of real GDP to the full employment level of real GDP to identify desirable monetary policies. Below, you are provided the schedules for aggregate demand...

Question