Question

Answer the following questions. Please rewrite the questions and write your answers in complete sentences and paragraphs. Remember that economics is a science and that we are concerned with describing what, how, and why behaviors occur, therefore it should be detailed enough to clearly convey the economic concepts, using the appropriate terminology. you should only rely on the material in this module and text and not on the internet.

Assume the economy is suffering from massive inflation and you are the Chairperson of the FED. What type of monetary policy would you employ and describe what changes are made to the four tools of monetary policy. Describe the subsequent impact on the money supply, interest rates, aggregate spending and real GDP individually.

Answer 1

The Chairperson of the FED would employ a contractionary monetary policy to control inflation, which involves reducing the money supply and increasing interest rates.

Step-by-step explanation:

If the economy is suffering from massive inflation, as the Chairperson of the FED, I would employ a contractionary monetary policy to control inflation. This type of monetary policy involves reducing the money supply and increasing interest rates.

Changes to the four tools of monetary policy would include:

Open market operations: The FED would sell government securities in the open market to reduce the money supply.Discount rate: The FED would raise the discount rate, which is the interest rate at which banks can borrow from the FED.Reserve requirements: The FED would increase the reserve requirements, which is the amount of money banks are required to keep as reserves.Interest on reserves: The FED would increase the interest rate paid on reserves held by banks which would discourage lending and reduce the money supply.

As a result, the money supply would decrease, interest rates would rise, and aggregate spending would decrease. This would lead to a decrease in real GDP as businesses and individuals would have less access to credit and would reduce their spending.