Monetary Policy Debates: a) Monetary Transmission Mechanism: According to the Ke

Question

Monetary Policy Debates:

a) Monetary Transmission Mechanism: According to the Keynesian school, show what happens, step by step, when the Federal Reserve sells US treasury bills to US banks.

i) Show the impact in the Money Market

ii) Show the impact in the Keynesian Cross Diagram

iii) Show the impact in the IS-LM graph

iv) Show the impact in the AD/AS graph

b) Quantity Theory of Money: According to the Monetarists and Rational Expectations, explain what happens, step by step, when the Federal Reserve sells US treasury bills to US banks. Describe the impact in words and:

i) Show the impact in the AD/AS graph

ii) Show the impact in the Phillips curve. (Include Short-run and Long-run)

c) What is the difference between the Keynesian view and Monetarist/Rational Expectations view on the short run and long run effects of discretionary monetary policy? What does this imply about the slope of the AS curve between these two schools of thought?

Explanation / Answer

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