Suppose the economy is experiencing inflation. What would be the interpretation of how a restrictive monetary policy would address this problem?
What will be an ideal response?
With a restrictive monetary policy, the Federal Reserve sells bonds, raises the reserve ratio, raises the discount rate, or increases the interest rate on reserves. As a consequence of these actions, excess reserves decrease, that in turn decreases the money supply. When this happens, interest rates rise, investment spending decreases and aggregate demand decreases. The end result is a fall in real GDP by a multiple of the decrease in investment.
You might also like to view...
In the loanable funds market, a shortage of loanable funds occurs when the
A) supply of loanable funds exceeds demand for loanable funds. B) quantity of loanable funds supplied exceeds the quantity of loanable funds demanded. C) demand for loanable funds exceeds supply of loanable funds. D) supply of loanable funds curve shifts rightward. E) quantity of loanable funds demanded exceeds the quantity of loanable funds supplied.
Define the Bertrand model and its assumptions. Explain why the model predicts the perfectly competitive outcome despite the number of sellers. Discuss the limitations of the model.
What will be an ideal response?
To reduce Agency problems, executive compensation should be designed to
a. be paid baased on quarterly sales b. create incentives so that managers act like owners of the firm c. avoid making the executives own shares in the company d. be an increasing function of the firm's expenses e. all of the above
Which of the following is a tool of commercial policy?
a. Corporate income tax b. Payroll tax c. Excise duty d. Tariff e. Octroi duty