Week 11 — Monetary Policy Report: From a Bond Trade to Aggregate Demand — Traditional alternative (no AI)

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Assignment 10 of the term — trace four links of the transmission mechanism with the course's numbers, explain what each figure means, and tell a relative how a central-bank rate cut could, or could not, reach a small business.

This week you learned to trace the transmission mechanism: a bond trade moves the money supply, the money supply moves the interest rate, the rate moves investment, the spending multiplier scales that change, and aggregate demand shifts. In Week 5 you shifted aggregate demand, in Week 7 you used the spending multiplier, and in Week 10 you watched the Fed's bond trades set an interest rate in the money market. In this assignment you work four short problems, interpret each one, and explain to a relative how a rate cut could, or could not, reach a small business. This week's lecture tutorial, quiz, discussion, and Model Workshop practice the same ideas from other angles.

The task

This report uses the week's illustrative numbers, constructed for this course and not real data: a money market where money demand is 1,200 minus 25 times the interest rate and the money supply starts at 1,050 dollars, so the rate starts at 6 percent; the course's engineered rule that investment changes 20 billion dollars for each one-point change in the rate; and a marginal propensity to consume of 0.8.

Work these four problems, showing every step on its own line:

1. In the illustrative money market, money demand is 1,200 minus 25 times the interest rate r, in percent, and the Fed buys bonds so the money supply rises to 1,100 dollars. What is the new interest rate, in percent?
2. In the same illustrative economy, the interest rate falls from 6 percent to 4 percent, and investment rises 20 billion dollars for each one-point fall. By how much does investment change, in billions of dollars?
3. In the same illustrative economy, investment rises by 40 billion dollars and the marginal propensity to consume is 0.8. By how much does aggregate demand shift right at the old price level, in billions of dollars?
4. In the same illustrative economy, the Fed instead sells bonds and the interest rate rises from 6 percent to 8 percent. With investment falling 20 billion dollars for each one-point rise and a marginal propensity to consume of 0.8, by how much does output change at the old price level, in billions of dollars?

Beside each figure, add one brief interpretation in plain words. For problem 1, say what the new rate means for borrowers, and why buying bonds loosens policy rather than tightening it. For problem 2, say what the change in investment means, and why business equipment and new homes count as interest-sensitive spending. For problem 3, say what the shift of aggregate demand means for the price level and real output, and why the spending multiplier, not the money multiplier, belongs on this link. For problem 4, name the direction of every link in the contractionary chain, from the money supply to aggregate demand.

Explain it to a non-expert

A relative who runs a small landscaping business hears on the radio that the central bank cut interest rates, and asks whether that means more customers next month. Write a 3–5 sentence message your relative could follow: how a lower rate could travel through borrowing and spending to reach a business like theirs, which link of the chain their customers sit on, and one honest limit, such as the lags before spending responds or the chance that people who expect hard times will not borrow anyway. Explain any technical term in everyday words. More than one good limit can be defended.

For a different, ungraded example, imagine a city that cuts downtown parking fees to bring shoppers back, and a café owner who asks whether sales will rise. Model message: "Cheaper parking makes a trip downtown cost less, so some people who were staying home will drive in. More visitors means more people walking past your door, and some of them will stop for coffee. That is a chain, and each step has to happen for the next one to matter. It may take a few months for habits to change, and if people are worried about their jobs, cheaper parking alone may not bring them out."

Use that pattern for the central bank's rate cut, with your own explanation.

Here is one honest note about scope: every number in this assignment is illustrative, so do not add a real interest rate, a real investment figure, or a length for the lags from the news. The engineered rule of 20 billion dollars per point is built for this course; real responses vary and are debated, which is why this report keys only on the model's numbers.

How to work

1. Draft all four figures, the four brief interpretations, and your message for the relative.
2. Check your draft against the attached scoring criteria, criterion by criterion: is every link of the chain present and in order, is the spending multiplier used on the output link with the money multiplier kept in its own link, does every arrow reverse in problem 4, and is every figure explained in plain words?
3. Revise at least one calculation or explanation, and write two or three sentences on what you changed and why.

Deliverables

Submit your monetary-policy report with all four figures, their brief interpretations, your message for the relative, and your two or three sentences on the revision. You may submit it written, recorded as audio or video with a transcript, or as a labelled sketch of the money market and the aggregate demand shift with a short note; every form is graded by the same scoring criteria.

Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

The calculations, reasoning, and explanations must be your own work. This version is built to be completed without any AI tool, and no part of it requires one. Use the chapter, your notes, and a calculator or spreadsheet, and show every step so your work can be checked. Do not copy another student's figures or wording.

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