Question

Assume the central bank decides to move and close the GDP gap (inflationary and recessionary )instead...

Assume the central bank decides to move and close the GDP gap (inflationary and recessionary )instead of fiscal policy.

In what direction will interest rates have to move to close the GDP gap and what type of open market operation will the central bank undertake?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Recessionary gap: in this case actual GDP is less than full employment GDP. if central bank decides to close the gap it has to enter the open market and purchase government securities. This will decrease the rate of interest in the system and investment will increase. As a result aggregate demand increases and real GDP will increase so much so that the gap is eliminated.

Inflationary gap: in this case actual GDP is more than full employment GDP. if central bank decides to close the gap it has to enter the open market and sell government securities. This will increase the rate of interest in the system and investment will decrease. As a result aggregate demand decreases and real GDP will decrease so much so that the gap is eliminated.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Assume the central bank decides to move and close the GDP gap instead of fiscal policy....
Assume the central bank decides to move and close the GDP gap instead of fiscal policy. In what direction will interest rates have to move to close the GDP gap and what type of open market operation will the central bank undertake? GDP gap (Recessionary and inflationery)
An open economy is currently in an inflationary gap. In attempt to reduce the inflationary pressure,...
An open economy is currently in an inflationary gap. In attempt to reduce the inflationary pressure, the central bank decides to adjust the target for overnight rate to close the inflationary gap. What should the central bank do?. Also, describe how the monetary transmission mechanism works for the proposed change in monetary policy.
If the U.S. government manages to close a recessionary gap and achieve potential GDP with fiscal...
If the U.S. government manages to close a recessionary gap and achieve potential GDP with fiscal policy, would we expect inflation or deflation to occur?
Suppose a country is facing an inflationary gap, and the Central wants to use monetary policy...
Suppose a country is facing an inflationary gap, and the Central wants to use monetary policy to stabilize the economy. What kind of policy should it follow? How will it impact bond prices, interest rates, investment, the exchange rate, net exports, real GDP, and the price level. Illustrate your analysis graphically with explanations.
An economy is in long-run macroeconomic equilibrium, with output at Yp, when the following aggregate demand...
An economy is in long-run macroeconomic equilibrium, with output at Yp, when the following aggregate demand shock occurs: The quantity of money in the economy declines and interest rates increase. What kind of gap (inflationary or recessionary) will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output? This will cause an inflationary gap; an expansionary policy should be used. This will cause a recessionary gap; an expansionary policy...
Question 1: Monetary Policy Suppose the economy is in an inflationary gap, and the Fed responds...
Question 1: Monetary Policy Suppose the economy is in an inflationary gap, and the Fed responds by conducting a contractionary monetary policy. a. Explain what the Fed does if it conducts open market operations to control inflation. b. Explain the effects of this monetary policy on interest rates, business investments, consumption expenditures, the value of the U.S. dollar, and the value of net exports.
Suppose a central bank decides to conduct monetary policy according to a rule for interest rates....
Suppose a central bank decides to conduct monetary policy according to a rule for interest rates. a) How does it choose the basic setting for the interest rate within the rule? b) How would it respond to a rise in the output gap (Y −YP)? c) How would the bank react to an inflation rate higher than its target inflation rate?
Assume that there are two economies, A and B. Economy A is experiencing an inflationary output...
Assume that there are two economies, A and B. Economy A is experiencing an inflationary output gap, and economy B is experiencing a recessionary output gap. Illustrate the two economies in labeled graphs. Explain what will happen to wages and other factor prices in economy A and if this will increase or decrease firm's unit cost. Given your answer in (b) show the effects on the AS curve. Explain what happens to real GDP and the price level. Explain what...
If the central bank decides to buy back more assets through open market operations... 1.) will...
If the central bank decides to buy back more assets through open market operations... 1.) will this stimulate or contract the economy? 2.) How does this affect interest rates? 3.) How do changes in interest rates affect supply/demand of interest earning assets
Assume an economy is in an inflationary gap in the AD/AS model, with an exceptionally low...
Assume an economy is in an inflationary gap in the AD/AS model, with an exceptionally low unemployment rate and an alarming rising inflation rate. Discuss the three major monetary policy tools available to the Federal Reserve, how they are likely to use them in order to address the issue, and the anticipated impact this would have on the economy (real GDP, the unemployment rate, and the inflation rate). In what way can unexpected changes to the velocity of money lead...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT