1. The Monetary Policy Mechanism Suppose a close economy with a mixed tax system, in which
firms reinvest part of their profits, is in a recession. Show the situation on the correctly labeled
Keynesian cross and the AD-AS model graphs. (a) What instruments can the Central Bank use in
order to improve the situation and what must be the change in each of these instruments?
Explain, how the change in each instrument will affect: (i) the commercial banks reserves; (ii)
the monetary base; (iii) the money multiplier; (iv) the money supply. For each instrument show
the changes on the graph in the (monetary base H money supply M) space. (b) Assume the
Central Bank chooses to undertake an open market operation. What are the open market
operations? What is the open market? Explain. What type of the open market operation will be
conducted in the existing situation? Show the change on the correctly labeled money market
graph. (c) Explain the first and the second round effects of the Central Banks action on each of
the following in the short run: (i) bonds prices (use both types of explanations: the liquidity
preference theory and the Central banks behaviour) (ii) the interest rate (iii) components of
aggregate demand (iv) investment spending (v) aggregateplannedexpenditures (vi)
unemployment (vii) real output (viii) the price level Use appropriate correctly labeled graphs of
the money market, the bonds market, the investment demand curve, the Keynesian cross, and
AD-AS model to illustrate these effects..
Micro-Scholarship, What it is, How can it help me.pdf
1. The Monetary Policy Mechanism Suppose a close economy with a mixe.pdf
1. 1. The Monetary Policy Mechanism Suppose a close economy with a mixed tax system, in which
firms reinvest part of their profits, is in a recession. Show the situation on the correctly labeled
Keynesian cross and the AD-AS model graphs. (a) What instruments can the Central Bank use in
order to improve the situation and what must be the change in each of these instruments?
Explain, how the change in each instrument will affect: (i) the commercial banks reserves; (ii)
the monetary base; (iii) the money multiplier; (iv) the money supply. For each instrument show
the changes on the graph in the (monetary base H money supply M) space. (b) Assume the
Central Bank chooses to undertake an open market operation. What are the open market
operations? What is the open market? Explain. What type of the open market operation will be
conducted in the existing situation? Show the change on the correctly labeled money market
graph. (c) Explain the first and the second round effects of the Central Banks action on each of
the following in the short run: (i) bonds prices (use both types of explanations: the liquidity
preference theory and the Central banks behaviour) (ii) the interest rate (iii) components of
aggregate demand (iv) investment spending (v) aggregateplannedexpenditures (vi)
unemployment (vii) real output (viii) the price level Use appropriate correctly labeled graphs of
the money market, the bonds market, the investment demand curve, the Keynesian cross, and
AD-AS model to illustrate these effects.
