Question

1. Assume unemployment is high and is a major problem in the United States. (a) In an effort to get unemployment back to its natural rate, the Federal Reserve enacts an expansionary monetary policy by purchasing $10 million in U.S. Treasury bonds. i. If the reserve ratio is 10 percent, what is the maximum increase in money supply that may occur as a result of the Fed's open market operation? Answer: ii. Give one reason why money supply may not increase by the amount given in part (a)(0)? Answer: (b) Using a correctly labeled aggregate demand and aggregate supply graph, identify each of the following i. The natural rate of output, labeled Y, Answer: ii. The equilibrium output and price level prior to the Fed policy action, labeled Y, and PL, respectively. Answer: ill. The new equilibrium output and price level after the Fed policy action, labeled Y, and PLZ respectively.

Answer 1

HRT ZUN solution eseme ralis is 10% WK O2 (013-352) max. increase in money supply = $ 9 million t 8 8.1 million + $ 7.29 million + $ 6.58 million t $5.90 million 8 so on. Money supply may not increase buy the amoundo ginen in part all because of the multiplier effect it es each e bank creates you it deposit loses i resecues to othee banks while use them to increase their loans and thus create new deposits until all excen usewes all used up. SAT level WK OZ (014-351) SAD N Price 7 Y Natural Y cate of output SUN 15 Where AS = AD aggregate aggregate supply deinand - AD aggraguthut after M All T W 1 7 8 T 2 9 F 3 10 S s 4 5 11 12 shift 6

In shait un WED MON JANUARY 2017 Pruce level JANUARY 2017 The expected increase in output will lu - 100X1-33 2 133:33 Diput In short run, pure leuel is fined and As is level Ruce inflation d) 1 A decrease in the corporate tak will effect private uues tuent through to direct and unducet channe A cut in corporate tax weil Амал тош ишобилемі , Lex или unemployment 112 A copocate Late tan late cut will I propel economic growth owth but not diastically It will make the workforce more broductive, so output Demployment THU TT 19 and wage lise ! e | Due to lowering of copocate tax com rates, foreign film begin purchasing land in dreuch. The effect on Bop will be shown in Nits Financial Account When focigners buy ownership, they have make payment to us, so that will taken as plus (t) sign supply Loanable funds maiket Unemployment Output → = $ 50 million gorunment spending - mp ce d. 75 g Government spending = mec multipun M T W T F S Real interest 5 7 10 12 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 DEC 2016 emory Demand 2 33 Quantity of loanable finds