Explain the linkages in the causal chain when the Fed conducts a contractionary monetary policy. What will be the ultimate effect on GDP?
Contractionary monetary policy will require the Fed to either sell government securities, raise the required reserve ratio, or increase the discount rate. This will cause the money supply schedule to shift inward and raise the equilibrium level of the interest rate. This, in turn, will cause a decrease in the investment component of total expenditures and shift the total expenditure schedule downward. This will reduce the equilibrium level of real GDP. Also, contractionary monetary policy will cause the aggregate demand curve to shift inward and cause a reduction in the equilibrium price level. In the end, a contractionary monetary policy will lead to a lower equilibrium price level and a lower level of equilibrium real GDP.
You might also like to view...
Economic growth
A) creates unemployment. B) has no opportunity cost. C) shifts the PPF outward. D) makes it more difficult for a nation to produce on its PPF.
By offering more generous unemployment insurance programs, European countries can expect
A) workers to gain new skills quickly in response to fluctuations in the labor market. B) longer periods of unemployment for their workers. C) to pay less in taxes than in the United States. D) shorter periods of unemployment for their workers.
What are two ways the government can use to maintain full employment in an open economy? Also give an example for each
What will be an ideal response?
Contractionary fiscal policy may have some undesirable consequences. Among these is
a. higher unemployment. b. higher inflation. c. higher net exports. d. larger federal deficits.