Price for the dollar will rise net exports will

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Macroeconomics
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Chapter 14 / Exercise 10
Macroeconomics
Roger A. Arnold
Expert Verified
Price for the dollar will rise. Net exports will decrease. US demands more imports. Contractionary policy causes interest rates to rise. Such a rise will induce international inflows of funds, thereby raising the international value of the dollar and making US goods less attractive abroad. The net export effect of contractionary monetary policy will be in the same direction as the monetary policy effect thereby amplifying the effect of such policy. The Net Export Effect of Expansionary Monetary Policy. Causes interest rates to fall. Funds will flow out of the US. Demand for dollars will decrease. Price for dollar will fall. Imports will fall exports rise. 354. Monetary Policy and Inflation. Short-run prices fluctuate. Long-run empirical studies show excessive growth in money supply results in inflation. The Equation of Exchange and the Quantity Theory. Ms V=PY. Example of the formula. Ms=actual money values held by nonbanking public.V=Income velocity, which is the number of times, on average per year, each monetary unit is spent on final goods and services.P=Price level or price index.Y=Real GDP per year.The Equation of Exchange as an Identity. Must always be true, it is an accounting identity. Ms V=PY=nominal GDPThe Quantity Theory of Money and Prices. Assuming V is constant and Y is constant money supply increases 20% then P increases 20%. Must be in balance.
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Macroeconomics
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Chapter 14 / Exercise 10
Macroeconomics
Roger A. Arnold
Expert Verified
355. Empirical Verification. Figure 16-5 shows relationship between money supply growth and inflation. International Policy Example: Iran Removes Four Zeros from Each Unit of its Currency. 356. Monetary Policy in Action: The Transmission Mechanism. Direct effect: increase in money supply causes people to have excess money balances. Indirect effect in Figure 16-6. Interest rate based money transmission mechanism, occurs because people have decided to purchase interest-bearing assets with their excess money balances. Causes the price of assets to go up. Interest rate falls. Induces people to spend more than they normally would. An Interest-Rate-Based Transmission Mechanism. Figure 16-7 (pg 357). Panel A shows that an increase in money supply reduces interest rate. Panel B shows a reduction in interest rate effects planned investment. Increase in investment increases aggregate demand in Panel C. 357. Targeting the Federal Fund Rate. The Fed actively affects interest rates by entering the market for T-bills. To raise interest rates it must sell more T-bills than it buys. Reducing reserves and money supply. This boosts interest rates. Vice versa. Three interest rates:Federal Funds rate: normal times banks rarely borrow from Fed. Federal Funds Market. Interest rate called Federal Funds Rate. Closely watched as an indicator of Fed’s intentions.358. The Discount Rate. When the Fed lends directly to institutions. Discount Window.

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