Question 5: (10 Marks Only)

Aim: How does the Federal Reserve or Monetary Policy impact the economy?

Topic: Money Multiplier and Exchange rate

Monetary policy affects interest rates and the available quantity of loanable funds, which in turn affects several components of aggregate demand. Tight or contractionary monetary policy that leads to higher interest rates and a reduced quantity of loanable funds will reduce two components of aggregate demand.

Required:

Apply all the models either Keynesian principle or classical school of economic thoughts on role of monetary policy during economic shocks. This will help you to provide more relevant response to list of questions below:

1)Why does the Federal Reserve rely on Open Market Operations the most to influence the money supply?

2)Why would the Federal Reserve rarely change the Required Reserve Ratio? ( Max

3)How do expansionary actions by the Federal Reserve increase the money supply?

4)How do contractionary actions by the Federal Reserve decrease the money supply?

5)Can monetary policy fix economic shocks?