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Chapter 16: Q.20 - Problems (page 369)

Take a look at Figure 16-3. Discuss a policy action that the Trading Desk at Federal Reserve Bank of New York could undertake in order to bring about the increase in aggregate demand displayed in the figure

Short Answer

Expert verified

The Desk should buy securities in open market operations, to increase Aggregate Demand in the economy.

Step by step solution

01

Aggregate Demand Concept 

Aggregate Demand includes the sum total value of all final commodities & services, which are planned to be bought by all the sectors of an economy.

  • AD is directly related to level of money supply in the economy. Higher money supply means more AD & lower money supply means less AD
02

FOMC Concept 

Federal Open Market Operations are process of buying & selling of government securities in open market. It is used as a monetary (quantitative) tool for regulating Aggregate Demand

  • Central bank prefers to buy securities (giving commercial banks & public cash) - to increase money supply, AD in the economy.
  • Central bank attempts selling securities (getting cash from commercial banks & public) - to decrease money supply, AD in economy

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Most popular questions from this chapter

Suppose that, initially, the U.S. economy was in an aggregate demand-aggregate supply equilibrium at point A along with the aggregate demand curve AD in the diagram below. Now, however, the value of the U.S. dollar suddenly appreciates relative to foreign currencies. This appreciation happens to have no measurable effects on either the short-run or the long-run aggregate supply curve in the United States. It does, however, influence U.S. aggregate demand.

a. Explain in your own words how the dollar appreciation will affect net export expenditures in the United States.

b. Of the alternative aggregate demand curves depicted in the figure- AD1versus AD2which could represent the aggregate demand effect of the U.S. dollar's appreciation? What effects does the appreciation have on real GDP and the price level?

c. What policy action might the Federal Reserve take to prevent the dollar's appreciation from affecting equilibrium real GDP in the short run?

Suppose that following adjustment to the events in Problem 16-8, the Fed cuts the money supply in half. How does the price level now compare with its value before the income velocity and the money supply change?

On the basis of Problem 16-1, imagine that initially the market interest rate is 5 per cent and at this interest rate you have decided to hold half of your financial wealth like bonds and half as holdings of non-interest-bearing money. You notice that the market interest rate is starting to rise, however, and you become convinced that it will ultimately rise to 10 per cent.

a. In what direction do you expect the value of your bond holdings to go when the interest rate rises?

b. If you wish to prevent the value of your financial wealth from declining in the future, how should you adjust the way you split your wealth between bonds and money? What does this imply about the demand for money?

Explain why the net export effect of a contractionary monetary policy reinforces the usual impact that monetary policy has on equilibrium real GDP per year in the short run.

Why do you suppose that corporate cash holdings have decreased slightly since 2015?
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