d. Suppose the Federal Reserve conducts expansionary OMO using the First Bank of Burgin. i. How will the Federal Reserve inject the money into the system? ii. Will OMO have any effect on the required reserves the first bank? e. Draw a correctly labeled graph of the money market and show the effect of the monetary policy action identified in part (d) on the equilibrium nominal interest rate. f. Based on the change in the equilibrium nominal interest rate identified in part (e), what will happen to aggregate demand in the short run? Explain. g. Now assume the economy is in long-run equilibrium. If the central bank pursues a policy of increasing the money supply at an annual rate of 5 percent, what will happen to inflation and real output in the long run? Assume in the long run that wages are flexible.

d. Suppose the Federal Reserve conducts expansionary OMO using the First Bank of Burgin. i. How will the Federal Reserve inject the money into the system? ii. Will OMO have any effect on the required reserves the first bank? e. Draw a correctly labeled graph of the money market and show the effect of the monetary policy action identified in part (d) on the equilibrium nominal interest rate. f. Based on the change in the equilibrium nominal interest rate identified in part (e), what will happen to aggregate demand in the short run? Explain. g. Now assume the economy is in long-run equilibrium. If the central bank pursues a policy of increasing the money supply at an annual rate of 5 percent, what will happen to inflation and real output in the long run? Assume in the long run that wages are flexible.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter14: Banking And The Money Supply

Section: Chapter Questions

Problem 3.4P

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