1. explain 2 factors that”can limit the Fed’s control of the money supply. 2.explain tge “interest...

1. explain 2 factors that”can limit the Fed’s control of the money supply.

2.explain tge “interest rate effect” on the slope of the AD curve

3. explain the “ theory of liquidity preference”

a) how does it explain tge downward slope of the aggrgate demand curve?

b) how would a decreae in money supply affect the aggregate demand curve ?

Solutions

Expert Solution

(1)

Fed can increase (decrease) money supply by open market purchase (sale) of government securities, by lowering (raising) discount rate or by lowering (raising) reserve ratio. However, Fed cannot precisely control the magnitude of change in money supply for following reasons:

(a) If people decide to retain higher (lower) proportion of their money as currency, the drainage ratio increases (decreases), which decreases (increases) money supply relative to Fed's intended change in money supply.

(b) If commercial banks keep higher (lower) proportion of their total reserves as excess reserves (without lending it), the excess reserves ratio increases (decreases), which decreases (increases) money supply relative to Fed's intended change in money supply.

(2)

When price level rises (falls), purchasing power falls (rises), so people demand more (less) money. Higher (lower) demand for money shifts the money demand curve rightward (leftward), and money supply remaining unchanged, interest rate rises (falls). Higher (lower) interest rate decreases (increases) investment and interest rate-sensitive portion of consumption demand, which decreases (increases) the quantity of real GDP demanded, giving the AD curve a negative slope.

NOTE: As per Answering Policy, 1st 2 questions are answered.

Rahul Sunny answered 11 months ago

Next > < Previous

Related Solutions

2. 2: Interest Rates: Cost of Money Cost of Money Four fundamental factors affect the supply of,...

2. 2: Interest Rates: Cost of Money Cost of Money Four fundamental factors affect the supply of, and demand for, investment capital, hence the -Select-amountcostdesirabilityItem 1 of money. These factors are: production opportunities, time preferences for consumption, risk, and inflation. If the entire population was living at the subsistence level, time preferences for current consumption would be -Select-highlowItem 2 , savings would be -Select-highlowItem 3 , interest rates would be -Select-highlowItem 4 , and capital formation would be -Select-easydifficultItem 5 ....

The Fed is the independent monetary authority for the USA. They control the money supply, interest...

The Fed is the independent monetary authority for the USA. They control the money supply, interest rates, and have big impacts on economic activity, the bond market, and inflation. Other nations have their "own" Fed. Discuss how the Fed is insulated form political pressure and how that insulation allows the Fed to do the best job possible. If there was independence and more political influence, then the Fed would be less effective.

write an essay explaining if the FED can control the money supply?

What are the 3 major instruments that central banks can use to control money supply? Explain...

What are the 3 major instruments that central banks can use to control money supply? Explain each one.

Can the money market be in equilibrium for any combination of money supply and interest rate...

Can the money market be in equilibrium for any combination of money supply and interest rate given a fixed money demand curve?

1.Explain four factors related to weight control. 2. State and thoroughly explain the factors that need...

1.Explain four factors related to weight control. 2. State and thoroughly explain the factors that need to be balanced for weight control. 3.What are your goals for weight control and what is your plan to accomplish them?

1. Describe the various factors that determine the money supply. 2. In your opinion, what should...

1. Describe the various factors that determine the money supply. 2. In your opinion, what should the Federal Reserve do with the money supply to deal with the coronavirus crisis.

1). The Fed can influence economic environment by regulating the money supply and interest rate. Discuss...

1). The Fed can influence economic environment by regulating the money supply and interest rate. Discuss the main instruments that the Fed uses to achieve this. In your discussion give examples of how the Fed would address, a) inflationary gap, b) recessionary gap. 2). Critics of federal banking policy argue that deposits insurance is a key for banking failures. The banks enjoy a "heads I win, tails the government loses" proposition. Several possible reforms of deposit insurance have been suggested....

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...

1. what are the types of money supply? 2. what is the relationship between money supply...

1. what are the types of money supply? 2. what is the relationship between money supply and interest rate ?

Subjects