Part 1 (0.2 point) See Hint To reduce the inflation rate, the Fed would want to
ID: 1165676 • Letter: P
Question
Part 1 (0.2 point)
See Hint
To reduce the inflation rate, the Fed would want to pursue CONTRACTIONARY OR EXPANSIONARY
policy.
Part 2 (0.2 point)
See Hint
The central bank changes the money supply using open market operations. The central bank would BUY OR SELL
bonds in the loanable funds market.
Part 3 (0.2 point)
See Hint
This action by the central bank will cause THE SUPPLY OF LOANABLE FUNDS TO FALL AND THE INTEREST RATE TO RISE OR THE SUPPLY OF LOANABLE FUNDS TO RISE AND THE INTEREST RATE TO FALL.
.
Part 4 (0.2 point)
See Hint
The change in interest rates will cause the economy to contract, and the economy moves from POINT A TO B, POINT A TO C, POINT A TO D
in the short run.
Part 5 (0.2 point)
See Hint
Over time, people adjust their expectations of inflation. Once workers and firms come to expect 0% inflation, the economy moves from POINT D TO A, POINT D TO B, POINT D TO C.
.
Explanation / Answer
1. To reduce inflation bank will reduce interest rates which is contractionary policy.
2. To increase money supply central Bank will buy bonds. It will increase money in the economy.
3. Central Bank raises the cash reserve ratio. It is the ratio which all banks have to maintain with the Central Bank
4 from a to b when employment rate is reduced it is because when government decides to give jobs to the people, inflation rate reduces keeping unemployment same when interest rates are reduced onsiderably