Question

Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp and prolonged inflationary trend. What changes in (a) the reserve ratio, (b) the discount rate, and (c) open-market operations would you recommend? Explain in each case how the change you advocate would affect commercial bank reserves, the money supply, interest rates, and aggregate demand. g

Answer 1

Answer:

Explanation:

1. Assuming an economy is experiencing a sharp and prolonged inflationary trend, I'll recommend the following changes:

a. Reserve ratio: I will increase the reserve ratio.

b. Discount rate: I will increase the discount rate.

c. Open market operations: I will recommend tightening the money supply through the selling of more government bonds.

2a. The reserve requirement is the central bank regulation which sets the minimum amount of reserves which must be held by a commercial bank. An increase in the reserve ratio will lead to less money in circulation.

b. the money supply: Thhe money supply will contract i.e tighten

c. Interest rates: Interest rates will rise leading to an increase in the investments which keeps money out of circulation and also lead to a decrease in inflation rates.

d. Aggregate demand. Aggregate demand would reduce, and this would lead to a reduction in inflation.