Author Question: Suppose the central bank implements a monetary expansion in the current period and is expected to ... (Read 106 times)

audie · **on:** Jun 30, 2018

Suppose the central bank implements a monetary expansion in the current period and is expected to continue this monetary expansion 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

Which of the followings is not a bank's assets?

A) reserves
B) loans
C) government bonds
D) checkable deposits

mcni194 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

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

Answer to Question 2

D