Reference no: EM133077363

Suppose that after observing the short-­-run effects of the increase in the money supply, the Federal Reserve decides not to reverse that policy action and, instead, leaves the money supply at its new, higher level permanently. a. Given that the Federal Reserve does not reverse its initial policy action, how will the economy move from the short-­-run equilibrium you described in question 7, above, to a new long-­-run equilibrium: through a shift in the aggregate demand curve, through a shift in the short-­-run aggregate supply curve, or through a shift in the long-­-run aggregate supply curve? (Note: focusing now just on the transition from the short run to the long run, only one of these curves will shift.) b. In which direction will the curve you mentioned above shift: to the left or to the right? c. Compared to its level in the initial long-­-run equilibrium, will the economywide level of prices in the new long-­-run equilibrium be higher, lower, or the same? d. Compared to its level in the initial long-­-run equilibrium, will real GDP in the new long-­-run equilibrium be higher, lower, or the same?

Suppose that the Federal Reserve acts to increase the money supply. a. In the aggregate demand/aggregate supply diagram, will this monetary policy action work initially to shift the aggregate demand curve, the short-­-run aggregate supply curve, or the long-­-run aggregate supply curve? (Note: focusing for now on just the short-­-run effects of the change in policy, only one of these curves will shift.) b. In which direction will the curve you mentioned above shift: to the left or to the right? c. When the curve you mentioned above shifts, what will the short-­-run effect on the economywide level of prices be: with it rise, fall, or stay the same? d. When the curve you mentioned above shifts, what will the short-­-run effect on real GDP be: will it rise, fall, or stay the same? e. When the curve you mentioned above shifts, what will the short-­-run effect on unemployment be: will it rise, fall, or stay the same?

3. Please answer the following questions, regarding the Federal Reserve's federal funds rate targeting strategy. a. Suppose that the Federal Reserve wants to hold its federal funds rate target constant but banks' demand for reserves decreases at any given interest rate. When faced with this shift in demand, what does the Fed have to do to keep the federal funds rate near its target: does it have to conduct an open market operation in which it buys US Treasury bonds or an open market operation in which it sells US Treasury bonds?

Suppose that two banks - the First National Bank and the Second National Bank - have balance sheets as shown below. For both banks, as in our in-­-class discussions, "other assets" simply refers to the value of bank buildings, office equipment, ATM machines, and other physical assets that the bank owns and uses in the course of its day-­-to-­-day operations.