Answer to Question #82793 in Macroeconomics for Marija Borcic

Question

2. Trace the impact of open market sales (restrictive monetary policy) on (1) the money market, (2) the loanable funds market and (3) the real economy in the short run (assuming that the economy starts at equilibrium in the goods and services market). How will the economy adjust to this shock in the long run (hint: I need you to trace the impact through three markets… so I am expecting 3 graphs for each of the three markets… For the G&S market talk about adjustment of factor costs)

Answer 1

The impact of open market sales (restrictive monetary policy) is:

(1) money supply will decrease, so the interest rate will increase and the equilibrium quantity of money will decrease.

(2) the supply of loanable funds will decrease, so the interest rate will increase and the equilibrium quantity of loanable funds will decrease.

(3) the real economy in the short run will decline, in the long run it will adjust with the decrease in demand for money and for loanable funds.