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Open-Market Operations and Aggregate Demand

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Would each of the following increase, decrease, or have no impact on the ability of open-market operations to affect aggregate demand? Explain your answer.

a. Investment demand becomes less sensitive to changes in the interest rate.

b. The marginal propensity to consume rises.

c. The money multiplier rises.

d. Banks desire to hold additional excess reserves.

e. The demand for money becomes more sensitive to changes in the interest rates.

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Hello,

A) Decrease, because open-market operations would have less impact on corporations and individuals' decisions to invest.

B) Increase, ...

Solution Summary

The effects on aggregate demand from changes in open-market operations are identified.

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Explain the change you advocate

Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp and prolonged inflationary trend. What changes in: 1- reserve ratio, 2- discount rate, 3- open-market operations would you recommend? Explain in each case how the change you advocate would affect commercial bank reserves, the money supply, interest rates, and aggregate demand.

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