Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect monetary contraction will have on the domestic economy. In your graphs, clearly label all curves and equilibria
What will be an ideal response?
A reduction in M will cause the LM curve to shift up and the domestic interest rate to rise. As i rises, the return on domestic bonds is greater than foreign bonds. This causes an appreciation and a reduction in NX. So, the demand for goods falls via the drop in I and NX. We will observe a higher domestic interest rate, an increase in E, a drop in I, a reduction in NX, and a reduction in Y.
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If the Fed sells securities worth $10 million to a commercial bank, the Fed's balance sheet will show
A) an increase in securities held of $10 million and an increase in bank reserves of $10 million. B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million. C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million. D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.
All of the following are reasons that health care costs have risen so much in the past few decades EXCEPT
A) the aging population. B) higher imports. C) new technologies. D) third party payments.