Author Question: Rising inflationary pressure caused the U.S. to tighten its monetary policy at the end of the 1960s. ... (Read 49 times)

arivle123 · **on:** Jun 30, 2018

Rising inflationary pressure caused the U.S. to tighten its monetary policy at the end of the 1960s.

As a result, market interest rates rose above the Regulation Q ceiling and American banks found it impossible to attract time deposits for re-lending. How did the banks get around this problem? A) by setting their own interest rates and then using better business as compensation for government regulations
B) by borrowing funds from European branches, which faced no restriction on the interest they could pay on Eurodollar deposits
C) by pushing through new legislation that nullified Regulation Q
D) by creating subsidiary branches in foreign countries
E) by waiting to trade time deposits until Regulation Q no longer applied

Question 2

What is the AA-curve? Why does it have a negative slope? What factors cause it to shift?

What will be an ideal response?

strudel15 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

B

Answer to Question 2

The AA-curve is the specific levels of E and Y under which the money and foreign exchange markets are in equilibrium.
The AA-curve has a negative slope because an increase in Y will cause E to fall (a domestic currency appreciation).
The factors that affect it are: the money supply, price level, expected exchange rate, foreign interest rates, and the level of real money demand.