Question

Suppose you are recommending monetary policy. The economy is experiencing a sharp and prolonged inflationary trend.

a. What change in open market operations would you recommend?
b. Explain how the change you advocate would affect the cash rate.
c. Explain how the change you advocate would affect the cost and availability of credit.
d. Use diagrams/graphs of the money market and also AD-AS to support your discussion.

Answer 1

a. We can recommend to tighten money supply by selling more government bonds.

b. The change we advocate would increase the cost and decrease the availability of credit.

c. The supply of money will decrease, the aggregate demand will decrease too.