Macroeconomics Instructor Miller Monetary Policy Assignment 1 (5 pts). What is t

Question

Macroeconomics Instructor Miller Monetary Policy Assignment 1 (5 pts). What is the Fed's dual mandate? 2 (20 pts). If the Fed orders a contractionary monetary policy, describe what will happen to the following variables: a. The money supply b. Interest rates c. Investment d. Consumption e. Net Exports f. The aggregate demand curve g. Real GDP h. The price level 3 (20 pts). If the Fed orders an expansionary monetary policy, describe what will happen to the following variables: a. The money supply b. Interest rates c. Investment d. Consumption e. Net Exports f. The aggregate demand curve g. Real GDP h. The price level 4 (10 pts). What are the two main tools that the Fed mainly relies upon to conduct monetary policy? Out of these two tools, which one is the major tool the Fed uses to affect the supply of reserves in the banking system?

Explanation / Answer

1.
Fed’s dual mandate refers to the two key objectives that are inherited in the Federal Reserve Act by the Congress. These two key objectives are maximizing the employment in the economy and stabilizing the price in the economy. Hence, these two objectives are considered as Fed’s dual mandate as a part of the monetary policy.

2.
The Contractionary monetary policy will cause:
A.   Money supply to come down
B.   Interest rates to increase
C.   Investments to come down
D.   Consumption to come down
E.   Net export to decrease
F.   The aggregate demand curve to come down
G.   Real GDP will decrease
H.   Price level will come down
The key objective of the contractionary monetary policy is to increase the interest rate and bring price stability. While doing so, consumption and investment come down that cause the aggregate demand to decrease.

3.
Expansionary monetary policy will cause:
A.   Money supply to increase
B.   Interest rates to decrease
C.   Investments to increase
D.   Consumption to increase
E.   Net export to increase
F.   The aggregate demand to increase
G.   Real GDP will increase
H.   Price level will increase
The key objective of the expansionary monetary policy is to increase the money supply and maximize the employment. While doing so, consumption and investment increase that cause the aggregate demand to increase. It causes the creation of new employment opportunities.

4.
Two main tools of the Federal Reserve are:
A.   Open market operation
B.   Federal Funds Rate
The major tool to increase the reserve of banks to affect the money supply is open market operations. Using this tool, the Federal Reserve buys the government securities to supply more funds as a reserve to the banks. Afterwards, banks can issue more funds as new loans to the households and firms.

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