Macro Problem Set 10

Recession may result if the money supply grows too

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Unformatted text preview: too quickly. Recession may result if the money supply grows too slowly. The monetarist model relaxes the assumption that real GDP is fixed. It assumes that velocity can be treated as a constant. MV=PY c) The Keynesian model says that velocity and real GDP are not constant or stable. The motives for holding money are transactions demand, precautionary demand, and speculative demand. An increase in the money supply will lead to a decrease in interest rates, this will lead to an increase in investment and finally this will lead to an increase in aggregate demand. 4. a) FOMC stands for the Federal Open Market Committee. b) The three main tools of monetary policy are open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations c) The structure of the FOMC is that it consists of 12 members including the president of the Federal Reserve Bank o...
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