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).
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Starting from long-run equilibrium, a large increase in government purchases will result in a(n) ________ gap in the short-run and ________ inflation and ________ output in the long-run.
A. expansionary; higher; potential B. recessionary; higher; potential C. recessionary; lower; lower D. expansionary; higher; higher
Briefly discuss the determinants of supply other than price
What will be an ideal response?
A fixed-weight price index provides less accurate changes than a chain-weighted system
a. True b. False Indicate whether the statement is true or false
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