18.3 Complete the following sentences: If the central bank wants to adopt a cont

Question

18.3 Complete the following sentences: If the central bank wants to adopt a contractionary monetary policy through an open market operation, it will (buy/sell) government bonds. This will --(increase/decrease) bank reserves and (increase/decrease) the stock of money. As a result, the (federal funds rate/discount rate) (increases/decreases). This leads to a(n)(increase/decrease) in (aggregate consumption/government spending) and in (investment/saving). The AD curve (moves leftward/moves rightward/ is not affected), the equilibrium output level in the short run is (higher/lower).

Explanation / Answer

18.3 If the central bank wants to adopt a contractionary monetary policy through an open market operation, it will sell government bonds. This will increase bank reserves and decrease the stock of money. As a result, federal funds increases. This leads to a decrease in aggregate consumption and in investment. The AD curve moves leftward, the equilibrium output level in the short-run is lower.

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