A. What tools can the Fed use to operate an expansionary monetary policy?
B. If the Federal Reserve Bank purchases a large stock of bonds, what happens to money supply? Explain. Use the money market diagram(money demand-money supply diagram) to illustrate the effects of such an intervention on the equilibrium interest rate. Why does the interest rate change(increase or decrease) following the bond purchase by the Fed?
C. Now use the ISLM model to illustrate graphically and explain verbally the impact of the bond purchase by the Fed on output, the interest rate, and investment in equilibrium. Clearly explain the effects on investment.