Question

Instructions:

1.Pay attention to the different labels used in the charts. If you see an AD-AS graph, that means you are to describe what happens in the US economy as a whole, or in the aggregate market, the market of ALL goods and services in the US. Unless noted otherwise, you are to describe both the short-run and long-run impacts.

2.On the other hand, if you see the regular S and D model, you are to describe the impact on a specific commodity market. In this case, you are applying the microeconomic theory we discussed early in the semester.

3.Assume other things constant and that each of the event introduced is unanticipated.

4.Explain your answers fully! For instance, if you argue that AD increases, explain which components of the GDP that drives the increase in GDP, and why.

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Question:

The Fed has several tools they can use to exercise their monetary policies. Describe two ways the Fed can do to exercise a tight money policy! Describe the kind of economic situation in which such a tight money policy would be appropriate for the economy! Explain why!

Answer 1

Fed can reduce money supply by:

• Sellling bonds in the market and accept cash from public in exchange of it. This will absorb extra money from market and reduce circulation which will result in decrease in money supply.
• Increase in reserve requirement: Reserve requirement is the ratio of every deposit bank keep with themselves and lend rest of the money. Rise in reserve requirement will raise money they keep with themselves which will reduce money supply.

Fed adopt tight monetary policy when they wants to reduce aggregate demand and eventually inflation rate or to vanish expansionary gap in the economy when current output level is more than potential output.