Answer to Question #49467 in Macroeconomics for stephanie

Question

How can the federal reserve increase the money supply using the following monetary policy tools?
A. discount rate
B.Reserve requirements
C Open market operations
D. Under what economic conditions (recession or overheated economy) would an activist economist advocate for this type of monetary policy? why?
E. Illustrate your answer with an aggregate demand and aggregate supply graph. Assume only one curved shifted (aggregate demand or short run aggregate supply.) identify any abbreviations used

Answer 1

If the federal reserve wants to increase the money supply using the following monetary policy tools, then:
A. discount rate should be decreased
B. Reserve requirements should be decreased
C Open market operations should be increased.
D. This type of monetary policy activist economist would advocate under recession, because increase of money supply will support business activity.
E. In case of increase of money supply aggregate demand curve will shift to the right.