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Chapter 16: Q.21 - Problems (page 370)

Consider figure 16.3, Discuss a policy action that trading desk at the federal reserve bank of New York could undertake in order to generate the decrease in aggregate demand displayed in this figure

Short Answer

Expert verified

The desk should sell government securities in open market operations, to generate decrease in aggregate demand

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 positive 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 is defined as buying & selling of government securities in open market. It is used as a monetary (quantitative) tool to regulate Aggregate Demand

  • Central bank tends to buy securities (giving commercial banks & public cash) - for increasing money supply, AD in the economy.
  • Central bank prefer selling securities (to get cash from commercial banks & public) - to reduce money supply, AD in economy

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Most popular questions from this chapter

Take a look at the two panels of figure 16.2, and also consider figure 16-1. Suppose that instructions in the latest FOMC Directive call for a monetary policy action aimed at inducing individuals & businesses to demand a smaller quantity of money. Use appropriate panel of figure 16-2 to assist in explaining whether officials at the Federal Reserve Bank of New York's Trading desk should buy or sell bonds.

Consider figure 16-7. Discuss a specific monetary policy action that Fed's Trading Desk could implement in order to induce the effects traced out by this figure.

Suppose that the quantity of money in circulation is fixed but the income velocity of money doubles. If real GDP remains at its long-run potential level, what happens to the equilibrium price level?

Assume that the following conditions exist :

a. All banks are fully loaned up - there are no excess reserves, and desired excess reserves are always zero.

b. The money multiplier is 4.

c. The planned investment schedule is such that at a 4percent rate of interest, investment is \(1400billion. At 5percent, investment is \)1380billion.

d. The investment multiplier is 5.

e. The initial equilibrium level of real GDP is \(19trillion.

f. The equilibrium rate of interest is 4percent.

Now the Fed engages in contractionary monetary policy. It sells \)2billion worth of bonds, which reduces the money supply, which in turn raises the market rate of interest by 1 percentage point. Determine how much the money supply must have decreased, and then trace out numerical consequences of the associated increase in interest rates on all other variables mentioned.

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