In: Economics
The economy is currently operating below full employment. Draw an ADAS graph correctly depicting our economy.
2. Identify the type of monetary policy (and how all the tools are adjusted) the Fed should enact in order to fix the economy.
3. Draw a money market graph correctly depicting the monetary policy you identified in number 2. Indicate how the above monetary policy would impact the above economy. Increase,Decrease, stay the same for the six below
Money supply
Interest rate
Investment
AD
Price level
Unemployment
5. Draw the impact of the above monetary policy on the graph you drew in number 1.
Economy is currently operating below full employment. Suppose
economy is initially equilibrium at point A where aggregate demand
curve and aggregate supply curve intersects and determines P level
of price and Y level of output.
2. Fed should enact expansionary monetary policy in order to fix
the economy into full employment equilibrium by reducing interest
rate to increase money supply in the economy.
Initially ISLM market is equilibrium at poiny E where IS curve and
LM curve intersects and determine the r level of interest rate and
Y level of output /income. If Fed implement expansionary monetary
policy which shifts LM curve rightward as LM1 and it will reduce
the rate of interest from r to r1 and output from Y to Y1.
As a result of exapansionary monetary policy, money supply in the
economy will increase and rate of interest falls. It will reduce
the cost of borrowing. Commercial bank tends to reduce the lending
rate of borrowing. It encourages the business firms to borrow money
from banks for investment. It will increase the investment in the
economy. As a result of higher investment, employment and income
level rises. It will increase the consumption. Higher investment
and consumption level boost the aggregate demand of good and
services. Thereby aggregate demand will increase. It results rise
in general price level. Higher price level increase the nominal
wages of workers. Therefore unemployment will reduce