Workshop_4_HW_Problems_and_Answers

Workshop_4_HW_Problems_and_Answers - Workshop 4 HW Problems...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Workshop 4 HW Problems and Answers 1. If the Fed lowers the federal funds rate using an open market sale, what will be the effect on other interest rates? The exchange rate? Money and bank loans? Long- term real interest rate? Expenditure plans? Aggregate demand? Other interest rates: Other short-term interest rate falls. Long-term bond interest rates also fall, but by a lesser amount. Exchange rate: The fall in the U.S. interest rate lowers the U.S. interest rate differential. The demand for U.S. dollars decreases and the supply of U.S. dollars increases. The exchange rate falls. Money and bank loans: Banks’ reserves have increased so they have excess reserves. Banks loan the excess reserves, so loans and the quantity of money increases. Long-term real interest rate: The real interest rate is determined in the loanable funds market. In the short run, the increase in loans increases the supply of loanable funds and lowers the real interest rate. Expenditure plans: Consumption expenditure and investment increase as a result of the lower real interest rate. Net exports increase as a result of the fall in the exchange rate. Aggregate demand: Aggregate demand increases with a multiplier effect so that the price
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

Workshop_4_HW_Problems_and_Answers - Workshop 4 HW Problems...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online