Answer to Question #135492 in Macroeconomics for mehnaz rashid

Question

Suppose you are at Interest Parity Condition between Taka and GBP. Explain with Diagram what will happen in the following scenarios:
(a) in the Bangladesh foreign exchange market if the UK Central Bank lowers the Reserve Requirement Ratio (RRR).
(b) in the Bangladesh foreign exchange market if Bangladesh Bank buys bonds from the market

Answer 1

a).When the Bangladesh foreighn exchange markert lowers the reserve requirement ratio,the result is that , commercial banks will have higher funds to disburse as loans, thereby increasing the money supply in the Bangladesh economy.The increased money supply in the economy causes a shift in the curve from AD to AD'as shown in the diagram below.The increased aggregate demand causes an increase price level from p* updwards in the figure below.

b).If the Bangladesh Foreighn exchange decides to purchase bonds from the market, the money supply in the economy increases by swapping out bonds in exchange for cash to the general public. The effect of increased money supply increases a shift in the aggregate demand curve from AD to AD' and also increases in the price level as shown in the diagram above.