These questions cover an expansionary monetary policy. Assume the textbook prese

Question

These questions cover an expansionary  monetary  policy.  Assume  the  textbook  presentation  where  monetary policy  works  without  any  problem.  Except  for  question  1,  your  answers  can  be  a  single word.

1)  Give  a  brief  summary  of  the  macroeconomic  circumstances  that  would  lead  the

Federal  Reserve  to  engage  in  an  expansionary  policy.

2)  Would  the  Fed  buy  or  sell  government  debt  assets  with  banks?

3)  Would  bank  reserves  increase,  decrease  or  no  change?

4)  Will  the  monetary  base  increase,  decrease  or  no  change?

5)  Will  the  supply  of  fed  funds  increase,  decrease  or  no  change?

6)  Will  the  fed  funds  interest  rate  increase,  decrease  or  no  change?

7)  Will  the  yield  curve  shift  up  or  down?

8)  Will  longer  term  interest  rates  (e.g.  10-year  T-Note)  increase,  decrease  or  no

change?

9)  How  are  longer  term  interest  rates  determined?

10)  In  response  to  the  change  in  longer  term  interest  rates,  will  investment  increase,

decrease  or  no  change?

11)  Will  the  growth  rate  of  aggregate  demand  increase,  decrease  or  no  change?

12)  Will  the  growth  rate  of  aggregate  supply  increase,  decrease  or  no  change?

Explanation / Answer

1.The situation when there is deficient demand in the economy or the aggregate demand is less than the aggregate supply in the economy. The lesser aggregate demand is unable to generate potential output in the economy. In this case there will be a gap between the aggregate demand and aggregate supply. The AD will be less than AS. The Federal Reserve in this case would resort to expansionary policy by infusing more money supply in the economy. This would include quantitative and qualitative monetary policy measures like decrease in the bank rate, reserve ratio and purchasing securities in the open market.

2. Buy

3.Bank reserves would go up as the reserve rate will go down as a result of expansionary policy.

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