Economics1

3924 WordsDec 26, 201216 Pages
Economics Student ID: B10016191 Name: Lee Sun Seok 李淳碩 (Tim) Q1. How does the government use the fiscal policy and monetary policy to stabilize the economy? ◆ According to the basic Keynesian model inadequate spending is an important cause of recessions. To fight recessions- at least, those caused by insufficient demand rather than slow growth of potential output- policymakers must find ways to stimulate planned spending. Policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called stabilization policies. Policy actions intended to increase planned spending and output are called expansionary policies: expansionary policy actions are normally taken when the…show more content…
In the long run, the real interest rate is determined by the balance of saving and investment. The nominal interest rate that the Fed targets most closely is the federal funds rate, which is the rate commercial banks each other for very short-term loans. -Why does the real interest rate affect planned aggregate expenditure? The Federal Reserve 's actions affect the economy because changes in the real interest rate affect planned spending. For example, an increase in the real interest rate raises the cost of borrowing, reducing consumption and planned investment. Thus, by increasing the real interest rate, the Fed can reduce planned spending and short-run equilibrium output. Conversely, by reducing the real interest rate, the Fed can stimulate planned aggregate expenditure and thereby raise short-term equilibrium output. The Fed 's ultimate objectives are to eliminate output gaps and maintain low inflation. To eliminate a recessionary output gap, the Fed will lower the real interest rate. To eliminate an expansionary output gap, the Fed will raise the real interest rate. Figure 24.9 The Fed lowers the Nominal Interest Rate. P 699 -What effect does an open-market purchase of bonds by Fed have on nominal interest rates? Federal Reserve has two other tools that it can use to change the money supply. The first involves changes in discount window lending, which occur when commercial banks borrow additional reserves
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