Monetary Policy (16 total points) 4a (7 points) Assume that because of weakness in the US economy, the Federal Reserve decides that it should...
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4. Monetary Policy (16 total points) 4a (7 points) Assume that because of weakness in the US economy, the Federal Reserve
decides that it should conduct expansionary monetary policy to increase spending in the
real sector. Use the model of the Loanable Funds Market and the Money Market to
illustrate how expansionary monetary policy is intended to affect an economy when
Y<Yfe and P=Pfixcd. You must include graphs of both markets to receive full credit for
this question. 4.b (5 points) Compare the new equilibrium to the equilibrium before the policy change,
in terms of what has happened to: 1) Y
2) SP
3) IP"
4) r5
5) i 6) P 4.c (4 points) Briefly explain how (and why) the effects of expansionary monetary policy
differ for an economy that is assumed to operate at capacity output (Y=Yf‘* and
P=Pfleijle). (You may use graphs to answer the question, but do not have to.)

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