4. The effect of monetary policy on aggregate demand Suppose the Federal Reserve ("the Fed") shifts to an expansionary m
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economy (increases/decreases)
rates (up/down)
invest (more/less)
result is (an increase/ a decrease)
demand (an increase/ a decrease)
and (an increase/ a decrease)
4. The effect of monetary policy on aggregate demand Suppose the Federal Reserve ("the Fed") shifts to an expansionary monetary policy by buying bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's expansionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to (?) 18 Money Supply 15 Money Demand Money Supply INTEREST RATE (Percent) Money Demand
INTEREST RATE (Percent) 18 15 12 6 3 0 Money Supply Money Demand 300 600 900 1200 1500 QUANTITY OF MONEY (Billions of dollars) 1800 Money Demand Money Supply
The following graph shows the demand for investment. Show the short-run effect of the Fed's expansionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have on the top graph. (?) 18 15 INTEREST RATE (Percent) I O
INTEREST RATE (Percent) 18 15 12 O 00 3 O 0 30 60 90 120 INVESTMENT (Billions of dollars) 150 180 I (?
The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its expansionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. (?) AS AD PRICE LEVEL AD AS
PRICE LEVEL AD AS REAL GDP (Trillions of dollars) Fill in the blanks to interpret the effect of the Fed's policy. This drives interest rates When the Fed buys bonds, the amount of money in circulation in the economy businesses to invest in capital improvements such as new factories and upgraded equipment. The result is demand, in the equilibrium price level, and in the equilibrium level of real GDP. which causes ▼in aggregate