Question

Suppose the Federal Reserve Bank decides to make an open market purchase. The Fed’s buy order is matched with a sell order placed not by a bank but instead an individual or a non-bank corporation. The Fed buys $150 in US T-bills from the non-bank public. The seller of the T-bills receives a $ 150 check from the Fed, which he or she cashes at Bank of America.

1. Using T-accounts show the impact of this transaction of the balance sheets of all three market participations
2. Non-bank public

Assets	Liabilities

Bank of America

Assets	Liabilities

The Fed

Assets	Liabilities

2. Using the AS-AD diagram, show what impact Fed’s decision will have on aggragate output and price level, (clearly label)

Answer 1

If the Federal Bank adopt a expansionary monetary policy through an open market operation ,it will buy government bonds.This Will increase bank reserves and increase the stock of money.As a result,the federal funds rate decreases.This leads to an increase in aggregate consumption and in investment .Further,the exchange rate decreases,thus net exports increases.The AD curve moves rightward ,the equilibrium output level in the short run is higher.

The AD-AS or aggregate demand and supply model is a microeconomic model that explane price level and output through the relationship of aggregate demand and supply .It is based on the theary of John Maynard keynes presented in his work.The general theory of employment,interest and money.It is one of the primary simplified representation of the modern field of microeconomics and is used by a board array of economist,from liberarion,monitarist supporters of laissez-faire,such as milton friedman, to post -keynesian supporters of economic interventionism,such as john robinson