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1 Suppose the economy is initially at full employment and that the Fed is happy with the existing rate of inflation. Assume that the economy is...

5 questions about Money Banking

1 Suppose the economy is initially at full employment and that the Fed is happy with the existing rate of inflation. Assume that the economy is subsequently subjected to an adverse supply shock (you pick one) and that the FED would like to stabilize the economy. Using aggregate demand aggregate supply analysis show and explain this situation, then explain the primary difficulties the Fed would have to contend with in choosing the optimal policy response. Be thorough. 2 Show and explain the equation of exchange based upon the income velocity of money. Briefly summarize the conditions under which changes in the supply of money are likely to exert a predictable influence upon aggregate economic activity. Be specific and use numbers to support your answer. Using the equation of exchange, translate increase in the money supply into the aggregate demand and aggregate supply model. 3 Compare and contrast the two principal theories about the demand for money. Be thorough. 4 Explain the main channels (not the Fed's tools: omo, rr, dr) through which the Fed can influence economic activity. Which theory has provided a better model, Classical or Keynesian, when it comes to predicting how money affects the macro-economy? Explain. 5 Current conduct of monetary policy clearly suggests that open market operations have become the Fed's dominant monetary policy tool. Justify and explain the characteristics of open market operations that make it a superior tool to reserve requirement and discount rate policy. Be sure to explain the advantages and disadvantages of each monetary policy tool.
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