Answer to Question #67504 in Macroeconomics for Stephen

Question

Suppose that the economy is in expansion (has an inflationary gap) in year x. Explain what
kinds of monetary policy the government may adopt. Explain also how such policies affect
(i) the market for bank reserves, (ii) the money market, (iii) the market for loanable funds,
and (iv) real GDP and the price level in the economy.

Answer 1

Central bank and government may adopt restrictive policy, because it is way to slow down economic grows and high level of inflation.
i) increasing of reserves
ii) decreasing of inflation
iii) increasing of price of loanable funds
iv)real GDP may decrease, inflation decreases