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Chapter 16: Q.16.3 Learning Objectives (page 349)

Evaluate how expansionary and contractionary monetary policy actions affect equilibrium real GDP and the price level in the short run.

Short Answer

Expert verified

Expansionary and contractionary monetary policy actions affect equilibrium real GDP and the price level in the short run by making GDP high and reducing it respectively.

Step by step solution

01

introduction

Monetary policy that lessens loan costs and animates acquiring is known as Expansionary and Monetary policy that increments financing costs and diminishes acquiring in the economy is contractionary.

02

explanation

Contractionary monetary policy prompts interest rates to rise because of which the number of loanable assets will be diminished. This will influence two parts of total interest.

The expansionary monetary policy prompts interest rates to lessen because of which the number of loanable assets will increment. This will influence two parts of total interest.

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Most popular questions from this chapter

What do you suppose might be gained-and by whom-if the Fed were to follow an easily understood rule as a guide for conducting monetary policy? Explain.

Why do you think that many people pay so much attention to likely future movements in the federal funds rate?

Identify the key factors that influence the quantity of money that people desire to hold.

Consider the two panels of Figure 16-2. Suppose that instructions in the latest FOMC Directive call for a monetary policy action aimed at pushing down the rate of interest prevailing in the economy. Use the appropriate panel of the figure to assist in explaining whether officials at the Federal Reserve Bank of New York's Trading Desk should buy or sell existing bonds.

Suppose that to finance its credit policy, the Fed pays an annual interest rate of 0.50 per cent on bank reserves. During the course of the current year, banks hold $1 trillion in reserves. What is the total amount of interest the Fed pays banks during the year?
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