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 on aggregate expenditure if the economy were an open one?
How will aggregate demand be affected, whether we treat the economy as closed or open? Illustrate in a

diagram.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

A6-11. Suppose a central bank decides it is appropriate to increase its policy interest rate in...

A6-11. Suppose a central bank decides it is appropriate to increase its policy interest rate in order to increase rates more generally throughout the economy. (a) Inthecontextofthemoneymarket,ifthemoneydemandfunctionisstable,explainhowthechangeinpolicy would be reflected in the money supply. [4] (b) Suppose the economy is a closed one. What effect will there be on investment, on aggregate expenditure? Include diagrams in your answer. [4] (c) What additional effect will there be on aggregate expenditure if the economy were an open one? [4] (d) How will...

Consider an economy in which the central bank uses the interest rate as its policy instrument....

Consider an economy in which the central bank uses the interest rate as its policy instrument. The policy-makers judge that the unemployment rate is too high and decide to pursue expansionary monetary policy to raise the output level. a. Illustrate and explain how expansionary monetary policy is expected to raise the output level. How would components of aggregate demand be affected by this policy? b. What are the limitations of expansionary monetary policy? What are the options available to the...

If the central bank lowers its policy interest rate, we would expect this to: Group of...

If the central bank lowers its policy interest rate, we would expect this to: Group of answer choices decrease the unemployment rate decrease aggregate demand increase market interest rates decrease the inflation rate

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...

Explain how the Central Bank can increase the interest rate in the economy.

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.

Suppose the central bank targets the money supply. As a result, the interest rate will ______...

Suppose the central bank targets the money supply. As a result, the interest rate will ______ and output will ______ following an increase in government spending A fall;rise B rise;fall C rise;rise D fall; fall

16. Suppose the central bank increases the money supply in order to increase the equilibrium level...

16. Suppose the central bank increases the money supply in order to increase the equilibrium level of GDP. Which of the following conditions would lead to a large increase in GDP given the increase in the money supply? A. A small marginal propensity to consume B. A very steep investment schedule C. A very steep money demand schedule D. All of the above conditions

Suppose the Indian central bank (RBI) increases its target overnight interest rate. In doing so it...

Suppose the Indian central bank (RBI) increases its target overnight interest rate. In doing so it is clearly trying to increase interest rates in the money market (and throughout the economy). (c) Suppose we could treat the Indian economy as a closed one. What effect will the results of the policy have on investment, on aggregate expenditure? Include diagrams in your answer. (d) Although not as open to capital flows as Canada, we can think of India is an open...

To help offset the costs from loan defaults, Chase Bank decides to increase the interest rate...

To help offset the costs from loan defaults, Chase Bank decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the credit worthiness of Chase's loan applicants is likely to Select one: improve. deteriorate. be unchanged.

Subjects