Question

ePage(s) 997-998 31.1. What is the effect of monetary policy in the short run? Place in order the events that occur in the short run when the Federal Reserve enacts expansionary monetary policy. As the Fed buys bonds, new money enters the loanable funds market: Market equilibrium shifts toward more money being lent at a lower interest rate The increased borrowing leads to increased investme and purchasing of goods and The aggregate der

Answer 1

The correct answer is the order that is presented in the snapshot.

1. As the fed buys bonds, new money enters the loanable funds market.

2. Market equilibrium shifts towards more money being lent at lower interest rates.

3. The increased borrowing leads to increased investment and purchasing of goods and services

4. The aggregate demand curve shifts rightwards.

Explanation -

When the federal reserve pursues expansionary monetary policy, it buys bonds from the open market. Banks and financial institutions sell the bonds and these banks are infused with liquidity.

As liquidity in the banking system increases, the overnight lending rate among commercial banks declines. Banks pass the benefit in the form of lowering interest rate for businesses and consumers.

At lower interest rate, leveraged consumption and investment spending increases. This triggers economic growth and the aggregate demand curve shifts to the right.