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4. From 2008 to 2015, the Federal Reserve tried to stimulate the economy after the Great...

4. From 2008 to 2015, the Federal Reserve tried to stimulate the economy after the Great Recession through expansionary monetary policy. Show and describe the effects of such an expansionary policy in the Keynesian model of monetary policy. You should include the money market, investment function, and AD/AS graphs. Explain.

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Answer #1

When the fed increases money supply,the Ms curve shifts to the right,reducing the interest rate to ir2 and increasing the quantity of money to M2.As a result the LM curve shift to the right to LM', reducing interest rate and increasing income to Y2.When the interest rate falls and income rises,then AD rises.The AD shifts to the right to AD',increaing price level and output or real GDP.

This is how this mechanism works.

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