Question

1. Suppose that the economy is suffering from a prolonged and deep recession. What changes in...

1. Suppose that the economy is suffering from a prolonged and deep recession. What changes in open market operations, the discount rate, and the reserve requirement would the Fed likely enact? Explain how each changed would effect bank reserves, the money supply, interest rates, and aggregate demand? 50 words

2. Evaluate the prospects for the transformation of the Chinese and Eastern European economies into market economies. 50 words

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Answer #1

It will purchase securities, reduce discount rate and reserve requirements. Purchasing securities, reducing reserve requirements and discount rate will increase money supply, interest rates would fall and aggregate demand will rise. Less reserve requirements will reduce required reserves and increase credit.

China after late 1960s and early 1970s has been moving progressively towards market system. Political leadership realised the disadvantages of Soviet type system quite early. Poland, Hungary, the CzechRepublic, and Slovakia2 has shown significant progress,and joined the OECD. Though there are countries where economic transition to market mechanism is slow, and still under way.

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