Question

7. Trace the cause-effect chain that results from the Conventional/Mainstream View of expansionary monetary policy when Fed action causes demand deposits to rise in the member banks . (list the sequence of events in the economy being clear and succinct, indicate increase, decrease of each successive change)

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Answer 1

7. Expansionary monetary policy: The expansionary monetary policy is the central bank policy to stimulate the economy through increasing money supply more rapidly than usual level. The central bank adopt expansionary monetary policy when the economy in unemployment and recession, the actions of expansionary monetary policy are Fed buvs government securities to increase the money supply, lowers reserve ratio, and lowers the discount rate that in turn, an increase in excess reserve. If excess reserve increases, it leads to falling federal fund rates and follows a rise in money supply and a decrease in interest rate As a result of a decrease in interest rate, the investment spending increases that lead to an increase in aggregate demand and ultimately result in a rise in real GDP