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Use the following information to work. The Bank of Korea's monetary policy is to reduce the vulnerability of South Korean won and achieve price stabilization t...

Question

Use the following information to work. The Bank of Korea's monetary policy is to reduce the vulnerability of South Korean won and achieve price stabilization through increasing money supply and lowering interest rates.How does the policy affect the price level in the short run and the long run?

Use the following information to work. The Bank of Korea's monetary policy is to reduce the vulnerability of South Korean won and achieve price stabilization through increasing money supply and lowering interest rates. How does the policy affect the price level in the short run and the long run?



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Use the following information to work. The Bank of Korea's monetary policy is to reduce the vulnerability of South Korean won and achieve price stabilization through increasing money supply and lowering interest rates. How does the policy affect the price level in the short run and the long run?

Hi, everyone. Today we're starting chapter 34 with question one where we're being asked to explain how each of the following developments would affect the supply of money, the demand for money and the interest rate. And we should illustrate our answers with diagrams. All right, so first of all, we don't determine what is the right kind of background we're gonna be using. Since our questions deal with a money market, it makes sense to use a simple supply and demand graph for the money market. Namely on the X axis. We have a quantity of money. Em on the Y axis. We have interest rates. Are the money supply curve will always be very cool because it's fixed by the central bank exogenous Lee and the money demand curve will be downward. Sloping. Now, just a quick reminder. Why's the money Domenic Irv downward sloping according to the theory of requested preference that we'd learned in chapter 34 the interest rate is the opportunity cost of holding money that is one. You hold wealth as cash in your wallet instead of as an interest bearing bonds he'd lose dangerous. You could have earned as a result and increasing the interest rate raises the cost of holding money and consequently reduces according to find demanded and vice versa. So we see there is a negative relation between the interest on the interest rates in money holdings, and hence the card will be Dad would stuff. All right, So part of one asks what happens when the feds bond traders buy bonds and open open market operations? Well, this is not a very difficult question, because we know that when the feds bond traders buy bonds, they increase the supply of money in the economy. So the money supply curve will move from M s one m iss to those shift to the right. And since this die, sex and downward sloping on domenica of Lower Point, are you a liberal interest rate would be lower women from our warrant, Artoo. And of course, this makes sense. Since the buying of bonds in open market operations in checks minded the economy, money becomes more abundant, and hence the interest they're going to be baring must be lower. Okay, Part B asks what happens when an increasing credit card availability reduces the amount of cash. People want hope This is even more straightforward because we've been given that people want to hold less money. So what does this mean? That the demand for money decreases. So the one demanded Carver will shift to the left MD one coast of empty, too. And hence, once again, the equilibrium interest is gonna drop from our warn. You are too parte si says what happens when the Federal Reserve reduces bank's reserve re part mints? Okay, well, let's think about it for a second. One of the many tools of the Fed is changing or setting the targets for the banks with the minimum banksreserve requirements. So if the feds says that now that banks needs to have 10% instead of 20% in reserve requirements, one of the bags going to do, you're going to be able to lend more money. Yeah, through loans. And this will definitely increase the one supply. So the months of, like her ships from M. S one m isu and once again think a liberal interest rate reduces toward two. This is very similar to, ah, to our first case party. All right, Part four says how scolds decide to hold more money to use for holiday shopping once again. Here it is. The answer is very straightforward, because we've been given that households want more money, so we know that the money Domenica will sift to the right from MD one empty too. And since money becomes more wanted in this economy, think about it as a more scars commodity. The interest the interest interest rate will have to increase from our one part two. Finally, we're being asked to determine what happens when a wave of optimism boosting but business investment and expands angry demand once again similar to party. What's happening here is that business become very optimistic about the future they wanted. Invest more than I want to take more loans, and this will increase the demand for money since agreement expense. So the money demand Carvel shift from MD want empty, too. And once again, since money Demet money because I become the more scars commodity more one calamity in the economy, the interest rate will rise from our want art, too

Of the question six for each of the three theories that the upward sloping upper slope off the shoot ankle piece of biker carefully explained the following. So the three theories are already listed out here. The 1st 1 is the sticky, which there is a 2nd 1 mistake price theory in that they're one that miss perception is theory. So these three theory explaining why the short aren't equity supply curve is up. Worst holding. Always a question A Isn't that how the economy recovers from a recession that returns and returns to its long, equally without any policy invention? Because you're b is asking what determines the speed off that recovery. So, um, question be is easier so and straight first. So, um, you split HQ. So what determines the recovery off the recession that iss, um to what Extend our the wage sticky and the price? Dickie order Miss Miss Perception Theory. So it say, for example, if the wage adjust very fast it is very, um, responsive to the economy shock that, uh, that means they're the recession. The recession is going to disappear very soon, and also if the price is not nearest the gate That means the factory can adjust their price of goods very quickly. Say there is a negative shops and shocked in economy. And then the factory knows what happens to the society. So you lower the price so that well make the recession disappear very quick. I agree. And also, if there is no misters miss perception to the market price or to the economy, the recession is also going to go there soon. So the court parts of the answer to countries that are so, to what extent are these three being this hope? And what about question a question, eh? Is basically asking us How come you coppers from a recession without any policy invention? So, uh, let's take a look at these theory one by one. So the sticky price of the speaking wage theory the first movie is saying that the unexpected low price level races the real which which causes the firm to hire workers and produce a small quantity of goods and service, is so that is saying, if now there is a recession in the economy, say there isn't expected it on expected really low price level. So I would say if now the price level is unexpected. It low. We will cost the wage to decrease the real wage to decrease. Oh, I'm sorry. We will cause the real ways to increase. Why is that? Because re a wage means that so real wage is your nominal wage, say, nominal wage divided by price level. Right. So if now you earn, say ah to Kate for a week. Oh, sorry to K per month. And then now in the market, the price of apple is decreasing. That means with this certain amount of wage, you can buy more apples in your real wages increased. Okay, that this Wyatt increase our prize is going to incur. You're a witch in the short run, re awaiting sugar. So, uh, farms hire fewer workers because now it is. It's more expensive to hire a worker, right? So labor, the labor that burns me that the firm needs is decreasing. So with your firm's they produce you were products that is in the short run. So, without any any policy intervention, how would this How is this phenomenal? It's going to go away. That is, people are going to adjust their, um, their expectation off the price because at first we have this unexpectedly no price level, right? So now if in the short run people will know that the price is always that no. So this apple is always that, um, cheap. That's safe. So as the owner off the firm, we know that we don't have to pay our later this to Kate, say to K per month, because if we pay lowers a a 1.5 k, they they still have money to buy the apple. Why is that? Because the apple in the market is now cheaper. So in the long run, the employer well adjusted nominal wage so that this increasing real wages going to disappear because if the denominator and but decrease the real wages not going to write. So, um if, like in the long run peas like Nona's low, it's like a sort of us in your level that we can expect, then the real wage will not go up. It will stay the same. So Ah, since labor is no longer that expensive for a firm firm, well retained its original level and hired the workers they need to produce, say Eiffel. So then the production of iPhone will not decrease. It will go to go back to the same level. So in conclusion, how the economy recovers is that in the long run, people's expectation off the price is going to go to go o say in a correct direction. So then then everything accordingly well, adjust. So, actually, this is like a general answer to all these questions to all these theory because, um, the sticky price is talking about the same thing. And, uh, Ms Perception is Osho talking about misters miss perception about prices. So in the long run, if the price level is steady, we can go back to the study economy that used to have

Okay, Question ni for each of the following events explained that should earn and long on effects on output in the price level. Mission policy makers take no action. So question, eh? The stock market declines sharply, reducing consumers wealth. So this question question is easy. Seems the consumers well, they reduced. People are not that rich. They can buy fewer goods. So the everyday supply Asari aggregating man curve shifts to the left and the girlie room moves from this this point to the red point over here. So in the short run, the price level is going down and the output is going down. But, um, in the long run, we know that the aggregate supply will just Oh, sorry. Well, adjust accordingly. So in the long run, we still have this equilibrium ended up here. All right, question be the federal government increases spending on national defense. So, uh, increase off government spending is and increasing. Aggregating men, we know that we have this new aggregating men here. So same we have this new equally broom here. So in the short round, the price live always going up in the production is going. But since this is not a technological change or something in longer on the aggregates of why is also going to adjust. So it is going to shift to the left. So the long run equilibrium well, ended up at this point. Okay, Question C is where we have a change in long run equities supply because it is saying that a technological improvement, racist, productive ity. So if we see something like racism productively, we know that it is the long run vertical curve shifts to the right. So this is the final, like the final, um, outcome. But how do we approach this? Why? No outcome. We approach this by moving aggregate supply and aggregating men like, gradually, I say we know that there is a tec mole. The technological improvement read that reasons Productive iti We know that. Okay, Now every firm can produce more. See ah, laptop or something. So we have a right shipped off this aggregate supply and also a red ship off equities demand. Because we know that people are sorry. We know that companies are producing more laptops and the lips of laptops all have a higher quality. They run faster, they have larger memory s O R aggregating man is also going to shift to the right. So that is how we end up this new equilibrium here that in the long run, the output is increasing while the price live always like uncertain, but most possibly going upward as well. Well, the question d r. Recession overseas causes foreigners buy fewer U. S. Goods so worst stabbed. We know that aggregate demand is decreasing because we know that now foreigners don't buy us product, so ready men decrease. But this is a case where, like, um, the aggregate will adjust accordingly as well. So in the short run, we have the good room right here at this rate thought. But then the, um, things people are expecting a lower price name respect, lower wages swept so the firm can hire more workers. So if we arrived at resupply also addressed to the right hand side, we still have the equally dream ended up here at the same level as it used to be.

When the Fed buys bonds and open market operations, we need to think about what they're actually doing. When the Fed sens. Traders to the open market. These traders have to use United States currency to buy bonds on the open market when they use these federal dollars on the open market. That increases the money supply as money flows from the Federal Reserve to the money supply. Now, if the Fed reduces the reserve requirement this what does this actually mean? This means that banks have to hold on to a less currency, which means that banks can then lend out more money. When banks lend out more money, the money supply goes up and you can think about more money being in people's pockets. Now, if the fat increases the interest rate it pays on reserves, this is a little more nuanced. So when the Fed pays on the interest on this interest rate on reserves, the Fed is goingto pay banks more to hold on to more caps. So it's going to pay banks told onto more cash. So because the banks like this, they're going to hold on to that currency loan out less and so less money will be loaned out, which means that the money supply will be decreased. Next, it's City Bank repays alone that it previously taken from the Fed. What does this mean? Well, this means that banks, in this case, City, City, bank it's going to pay back It's loan to the Federal Reserve. Well, that money was once out here in the money supply. So it flows along here and so we can see that that will actually decrease the money supply. Okay, let's pretend that a rash of pickpocketing happens and people decide to hold on to a less currency. What is this actually going to do? Well, people are scared to hold on the cash. So what are people going to do? They're going to put their money in a bank If they're putting their money in the bank. That means that there's less cash in their hands, more in the bank. And that means that banks convention out, loan out more money for mortgages and things like that. What is that going to do to the money supply? Well, that's gonna increase the money supply. All right, imagine again. People here, they're fearful of bank runs they're going to try and pull all their money out of months. Okay, well, bankers are going to react to that, and they're going to hold onto Mohr excess reserves. They're gonna hold more money within the bank's walls. What's that going to do to the money supply? We'LL think about it, Banks, you're gonna lend out less money. And so there's going to be less money out there. So we're going to think that that's going to decrease the money supply. Lastly, if the Fed increases its target, open market operations increases its target for the federal funds rate. Remember the federal funds rate? That is the rate that banks loan one another when they are short on capture these very short term loans. So if the Fed is increasing its target, what does that mean? Well, if its target is to increase that rate so that it wants banks to have a higher interest rate that's loaning one another, that means that they are trying to decrease the money supply. That's the ultimate goal. But remember what the federal funds rate is. The Fed can't actually control this explicitly. They have to engage open market operations that will help bring this rate up, so they're going to take some of these actions if we've already talked about to try to raise the federal funds rate, all of which will decrease the money supply because as banks have to spend more money to loan each other short term cash, they're going to just hold on to that money, and that's going to decrease the money supply.


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