Suppose the Central bank is conducting an expansionary monetary policy, in the new monetarist model by issuing outside money and exchanging it for government bonds on the open market

Economics Apr 02, 2022

Suppose the Central bank is conducting an expansionary monetary policy, in the new monetarist model by issuing outside money and exchanging it for government bonds on the open market.

What are its effects on FLA? Illustrate the equilibrium effects of this on aggregates variables. Does it matter if there is a liquidity trap where excess reserves are held in the financial system? If so why? and if not, why not? explain.