Short Answer1. Assume the Federal Reserve Board is undertaking anexpansionarymonetary policy....

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Short Answer1. Assume the Federal Reserve Board is undertaking anexpansionarymonetary policy. Explain the details of how the expansionary Fed impacts each of the following:Open market operations - how does the Fed use open market operations for an expansionary monetary policy?The monetary base.Money Supply.Fed funds interest rate.Long-term interest rates.Business Investment.Aggregate demand.Economic growth.Unemployment rate.2. Under certain circumstances, expansionary Fed policy may not have much of an effect on the rate of economic growth. Give a reason why, and explain?3. Regarding the Asian currency crisis, answer the following questions:Describe the normal reasons why a currency undergoes a significant depreciation and what were the important characteristics of the Asian countries involved in the crisis?What are some expected domestic economic consequences of the currency crisis for the countries involved? Focus on:import prices of goods and services into the Asian country.export prices of goods and services from the Asian country.Domestic inflation rates.Assume that the countries involved undertake a tight monetary policy and raise interest rates in response to the crisis. What are the two primary reasons for raising interest rates in their case?Given high domestic interest rates, what is the economic outlook for these Asian countries in the next few years?

Robert · Accepted Answer

Assume the Federal Reserve Board is undertaking an expansionarymonetary policy. 
Explain the details of how the expansionary Fed impacts each of the following: 
Open market operations - how does the Fed use open market operations for an 
expansionary monetary policy? 
The monetary base. 
Money Supply. 
Fed funds interest rate. 
Long-term interest rates. 
Business Investment. 
Aggregate demand. 
Economic growth. 
Unemployment rate. 
Answer: 
In order to conduct expansionary monetary policy, Fed (under open market operations) 
would purchase government securities from the open market. This would increase the 
monetary base and ultimately (due to subsequent credit creations) would lead to increase 
in money supply by multiple of initial increase in monetary base.   
Federal funds rate is determined by the demand and supply of funds that depository 
institution holds at the Federal Reserve Banks where the supply and demand of funds at 
the Federal Reserve Banks are influenced by the monetary policy tools such as open market 
operations, the discount rate, and the reserve requirements.  So If Fed follows 
expansionary monetary policy such as by buying government security from the open 
market, then it would lead to fall in the Federal funds rate because expansionary monetary 
policy will lead to increase in the supply of federal funds.  
The long-term interest rates are determined by the expectation of future levels of inflation 
by market and therefore accordingly we have upward or down ward sloping yield curve. 
If the federal fund rate is set at too low, then asset/bond market believes that inflation are 
expected to increase in the future i.e. there will be inflationary expectation and therefore 
long-term interest rate will increase and we would have upward sloping yield curve. 
Business investment is inversely related with short term interest rates in the market. So if 
short term interest rate falls, business investment will increase. Further business 
investment is an important component of aggregate demand, so if business investment 
increases, aggregate demand will also increase.

Short Answer 1. Assume the Federal Reserve Board is undertaking an expansionary monetary policy. Explain the details of how the expansionary Fed impacts each of the following: Open market operations -...

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