Symbols: = Up = Down — = No effect ? = Uncertain Use the above symbols to fill i

Question

Symbols:         = Up                        = Down        — = No effect             ? = Uncertain

Use the above symbols to fill in the table below:

a) (5 points)

Observations

Effect on

Ms

Md

r

I

Y

C

The Fed decreases discount rate

The government implements stimulus package

Net effects

b) (5 points) What if the Fed buys government securities and the government increases spending at the same time? Show your reasoning.

Observations

Effect on

Ms

Md

r

I

Y

C

The Fed decreases discount rate

The government implements stimulus package

Net effects

Explanation / Answer

a)

b) When government buys securities it would lead to decrease in money supply in the economy that may lead to decrease in spending, where as if it increases spendingit would lead to increase in income, employement and spending. Thus there will be no effect on spending/consumption.

Observations Effect on Ms Md r I Y C The Fed decreases discount rate With lower discount/interest rates banks will be able to borrow more rom Federal hence Money supply will increase No effect on Money demanded With increase in supply, rates will go down Investment will also go down because of low interest rate Income will also decrease with lesser investment Consumption will increase because of more money supply In economy. The government implements stimulus package No effect No effect on Money demanded no effect Investment will be increased Income will be increased Consumption will be increased

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.