posted by .

In the Monetary policy transmission mechanism, explain what could go wrong between the following points
1. Change in the monetary policy and Change in the money supply
2. Change in the money supply and Change in the aggregate demand curve
Change in the aggregate demand curve and Change in prices, real GDP, and employment

Im not exactly sure what you are asking. So, my response will be rather general in nature.

Monetary policy consists of the things the Federal Reserve can do. Ask yourself, what are these things?
The Fed can 1) change reserve requirements, 2) change the discount rate, or 3) it can engage in open market purchases and sales of government securities. Each of these can have both indended and unintended consequences, or in certain circumstances, have no effect at all. For example, as Keynes argued, if the economy is in a liquidity trap, increasing the money supply will have no effect on aggregate demand.

I suggest you start with a standard IS/LM model. Draw several extreme scenarios (e.g., a liquidity trap where the LM line is flat, or full employment where the IS curve is vertical. The apply a monetary policy and see what happens to interest rates, and real GDP, etc.

Lotsa luck

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. Economics

    In the Monetary policy transmission mechanism, explain what could go wrong between the following points
  2. economics

    Decreasing the money supply involves which type of economic policy?
  3. Macroeconomics

    The effectiveness of monetary policy depends on how easy it is for changes in the money supply to change interest rates. By changing interest rates, monetary policy affects investment spending and the aggregate demand curve. The economies …
  4. Economics

    Concern about international crisis has caused consumers to save their money and postpone big purchases. What is the effect on aggregate demand and aggregate supply?
  5. Macro Eco

    The belief that monetary policy can be effective in changing aggregate demand and that the money supply is the critical monetary variable is associated with: Answer a Modern Keynesians. b Monetarists. c Supply-side economists. d New …
  6. economics

    The central bank is rensponsible for the management of monetary policy. What is the major tool of monetary policy, and how would it operate in the context of a tight money policy?
  7. economics

    Help me reword this?? The Fed is organized as a corporation, owned by its member banks, and directed by a government-appointed board. Monetary policy affects the size of the money supply and the level of interest rates. The first "tool"
  8. Macroeconomics

    (Monetary Policy and Aggregate Supply) Assume that the economy is initially in long-run equilibrium. Using an AD–AS diagram, illustrate and explain the short-run and long-run impacts of an increase in the money supply.
  9. Macroeconomics

    (Monetary Control) Suppose the money supply is currently $500 billion and the Fed wishes to increase it by $100 billion. a. Given a required reserve ration of 0.25, what should it do?
  10. Economics

    Match the following statements to the proper terms. 1. fiscal policies that favor increasing government spending rather than adjusting taxes 2. fiscal policies that favor cutting taxes rather than increasing government spending 3.A …

More Similar Questions