Explore BrainMass

Explore BrainMass

    Trouble understanding Monetary Policy

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    -If the Fed cuts the quantity of money, explain how each of the following items change.

    a) Business' purchases of new capital equipment.
    b) Households' purchases of new cars and houses.
    c) Foreign purchases of U.S.-made goods and services.
    d) Americans' purchases of Canadian-made goods and services.

    -What is the multiplier effect of monetary policy?

    -How does it work?

    -How does the size of the expenditure multiplier influence the size of the multiplier effect of monetary policy?

    If time is an issue to complete this problem I may be able to add a few more hours to the deadline but my project is due at midnight PST today and I need time after your review. PLEASE let me know and I will work with you. I have had excellent reviews from my friends that use this site and am anxious to work with you! I'll check back frequently throughout the day.

    © BrainMass Inc. brainmass.com October 10, 2019, 1:19 am ad1c9bdddf

    Solution Preview

    1. Fed reduces money supply.

    First, there is a short run change and a long run change, we will look at the short run first.

    In the short run, when money supply reduces, the amount of money people has decreases. In the short run, price remains the same, so reducing money supply is essentially increasing prices. Consider the example that you have an $100 weekly income, if the Fed reduces money supply, your boss now only has $50/wk to pay you. Given that price level remains the same, the amount of goods you can purchase has reduced. Now, because you have less money, you need to borrow, so interest rate goes up. To summarize, in the short run, if money supply goes down, interest rate goes up.

    In the long run, price level will adjust. Because people are poorer, they consumer less goods, and price of goods fall, so that the amount of goods people can buy after the reduction in money supply is the same as the ...

    Solution Summary

    Trouble understanding Monetary Policy