Author Question: Suppose the central bank implements a monetary contraction in the current period and is expected to ... (Read 41 times)

elizabeth18 · **on:** Jun 30, 2018

Suppose the central bank implements a monetary contraction in the current period and is expected to continue this monetary contraction in the future. Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

What will be an ideal response?

Question 2

Suppose bank A has assets of 100, liabilities of 80, and capital of 20. Its leverage ratio is

A) 4.
B) 5.
C) 10.
D) 9.

ErinKing · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

In the current period, the LM curve will shift up causing r to rise and Y to fall. The expectation that this will continue will cause individuals to expect higher future rates and lower future output. The higher future rates will decrease current C and current I. The lower future Y will do the same. So, we will also see a leftward shift in the current IS curve. This will tend to decrease the current r and current Y as well.

Answer to Question 2

B