Use the money market to answer this question. Suppose there is a reduction in income. First, briefly explain what effect this will have on the interest rate. Second, explain all types of policies the central bank could implement to prevent this reduction in income from affecting the interest rate

What will be an ideal response?


The reduction in income will cause a reduction in money demand, a leftward shift in the money demand curve, and a reduction in the interest rate. To prevent the drop in the interest rate, the central bank could pursue an open market sale of securities (to reduce the money supply) or it could increase the required reserve ratio (which would also reduce the money supply).

Economics

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A. expansionary; higher; potential B. recessionary; higher; potential C. recessionary; lower; lower D. expansionary; higher; higher

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Briefly discuss the determinants of supply other than price

What will be an ideal response?

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a. True b. False Indicate whether the statement is true or false

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Rules advocates believe that the central bank should change interest rates in an attempt to fine tune the economy

a. True b. False Indicate whether the statement is true or false

Economics