All answers except 1) can be one word 1) Give a brief summary of the macroeconom

Question

All answers except 1) can be one word

1) Give a brief summary of the macroeconomic circumstances that would lead the Federal Reserve to engage in an expansionary policy.

2) Would the Fed buy or sell government debt assets with banks?

3) Would bank reserves increase, decrease or no change?

4) Will the monetary base increase, decrease or no change?

5) Will the supply of fed funds increase, decrease or no change?

6) Will the fed funds interest rate increase, decrease or no change?

7) Will the yield curve shift up or down?

8) Will longer term interest rates (e.g. 10-year T-Note) increase, decrease or no change?

9) How are longer term interest rates determined?

10) In response to the change in longer term interest rates, will investment increase, decrease or no change?

11) Will the growth rate of aggregate demand increase, decrease or no change?

12) Will the growth rate of aggregate supply increase, decrease or no change?

Explanation / Answer

Give a brief summary of the macroeconomic circumstances that would lead the Federal Reserve to engage in an expansionary policy.

ANs: Expansionary policy means you are raising aggregate demand in the economy through fiscal or monetary decisions. For expansionary policy are take when aggregate demand is less than aggregate supply, or economy is in recession, or below its full employment level. Expansionary policy help to boost the aggregate demand which in turn raises the output, employment, investment in the economy. Macro variables which are seen as indicator for recessions are:

2) Would the Fed buy or sell government debt assets with banks?

ANs: Buy debt asset with bank as it will increase money supply in the economy

3) Would bank reserves increase, decrease or no change?

Ans: No change, as the asset value will be same but its composition will change from debt asset to cash or currency

4) Will the monetary base increase, decrease or no change?

Ans: Increase. The monetary base refers to that part of the money supply which is highly liquid, as cash increases with bank

5) Will the supply of fed funds increase, decrease or no change?

Ans: no change

6) Will the fed funds interest rate increase, decrease or no change?

Ans: interest rate will fall as money supply increases

7) Will the yield curve shift up or down?

Ans: price will go up, as a result yield will come down (they are invesrly related)

8) Will longer term interest rates (e.g. 10-year T-Note) increase, decrease or no change?

Ans: decreases as money supply increases

9) How are longer term interest rates determined?

Ans: supply and demand for loanable fund.

10) In response to the change in longer term interest rates, will investment increase, decrease or no change?

Ans: Increases, as interest rate falls,

11) Will the growth rate of aggregate demand increase, decrease or no change?

Ans: Increases, due to higher investment demand, aggregate demand shift upwards.

12) Will the growth rate of aggregate supply increase, decrease or no change?

Ans: increases, as inventory level decreases with time due to higher demand, so to compensate for lower inventory level firm will increase their output.

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