Monetary Policy: a

Subject:EconomicsPrice: Bought3

Share With

Monetary Policy:

a. On March 16, 2020 the Federal Reserve ordered its trading Desk to undertake open market operations such that the Federal Funds rate would be reduced to, effectively, zero. The economy, however, is still in recession. On April 29, 2020 the Federal Reserve issued a statement indicating that it would maintain this interest rate level "until it is confident that the economy has weathered recent events." The economy remains in recession. The Fed might attempt to stimulate the economy with further expansionary monetary policy. Suppose, however, that the money demand curve starts to flatten out at these low interest rates. Describe what it means for the money demand curve to be completely elastic. If that is the case, what would happen if the Fed tried to expand the money supply further?     

b. We generally assumed that the multiplier from monetary policy is the same as the spending multiplier from fiscal policy (i.e.,  1/(1-MPC) ). In practice, however, the multiplier for  monetary policy is likely smaller than this. What might cause the multiplier from monetary policy to be smaller than we assumed? (Hint: consider the money demand curve.)