Describe the channels by which monetary policy ripples through the economy and explain how each channel operates
What will be an ideal response?
When the Federal Reserve lowers the federal funds rate, other short-term interest rates also fall. As a result, the exchange rate falls because investors decrease their demand for U.S. dollars since the interest yield on dollars is lower. When the Federal Reserve lowers the federal funds rate it does so by buying securities in the open market. Bank reserves increase so that banks have excess reserves. Because banks have excess reserves, they loan the excess. Loans increase and a multiple expansion of the quantity of money results. The supply of loanable funds increases so that the long-term real interest rate falls and consumption and investment increase. Net exports increase because of the lower exchange rate. All three of these changes increase aggregate demand, so that real GDP growth and the inflation rate both increase.
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Which of the following describes a positive externality?
A) The government imposes a tax on cigarettes in order to discourage smoking among teenagers. B) People who do not attend college still benefit from others who receive a college education. C) John Henry paints the outside of his house in order to increase its market value just before he puts the house up for sale. D) Mary volunteers to drive her neighbor's children to soccer practice.
Which of the following changes would cause American net exports to increase?
A) An increase in the real value of the dollar B) An increase in American income C) An increase in foreign income D) A shift in demand by American consumers away from domestically produced goods