Interest rates ad the fed buys treasury bonds from

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Interest rates? AD? The Fed buys Treasury Bonds from the public, which shifts the Money supply (M S ) rightward AD shifts rightward due to the decrease in interest rates which increases C, I and NX and AD 2 shifts back (to the right) to AD 1 (When interest rates decrease, the value of the dollar decreases) 42. When the Fed engineers an OMS, how does this affect the loanable funds market? the money market? Interest rates? AD? Buyers of Treasury securities (from the Fed) write checks to the Fed deposits decrease and M S decreases The increase in r decrease C, I and NX and AD shifts leftward (interest rates increase, Exchange rate increases, Net exports decrease) 43. What is monetary policy to stabilize the economy during recession? During an inflationary boom? In our AD/SRAS/LRAS model, which curve is affected? How? During Recession, OMP; AD shifts rightward During Inflationary Boom, OMS; AD shifts leftward 44. Describe monetary policy during the Great Recession. Why were the initial steps by the Fed to stabilize the economy not very effective? OMP: to lower the target Federal funds rate—Interest rates went down to almost zero these actions did little to stimulate the economy—Why? credit crunch—banks were hesitant to lend Not effective because the banks were not lending funds to credit crunch 45. Quantitative Easing: the Fed purchased what types of securities?
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Quantitative Easing (QE: like OMP) to lower long-term rates—on mortgages and business loans to stimulate the economy 46. Because short-term interest rates were near zero, the FOMC took nonconventional (or atypical) measures (quantitative easing) to stabilize the economy. What was the objective of these measures with respect to interest rates? (See text page 498 5 th [p. 502 4 th ]) They wanted to decrease interest rates to increase investment spending and encourage people to get mortgages to increase the housing market. 47. Suppose AD shifts to the right beyond full employment output. How would monetary policy makers at the Fed respond? Illustrate using the AD/SRAS/LRAS model. Would the outcome be different if the economy were left to adjust on its own without any policy intervention? They would use open market sales to increase interest rates and decrease the M S , which will shift AD back to the left. 48. Why was the Great Recession “Great”? It is great because the Financial Crisis cam before it and when a financial crisis comes before a recession it makes it even worse. It was a much larger shift in AD and credit crunch. It will take a lot better to get back because the length and severity was enormous compared to other recessions. 49. Is the U.S. economy now back to full employment output? No 50. Does the Fed control interest rates? No 51. Why should the Fed be clear about its monetary policy objectives? If the Fed says inflation is rising or is low it will affect the way we negotiate our wages for the next year Chapter 16, packet pages 170 - 181 52. What is fiscal policy to stabilize the economy during recession? During inflationary boom? In our AD/SRAS/LRAS model, which curve is affected? How?
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Christopher Reinemann
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