Chapter 28 Qtr & Pe

Chapter 28 QTR’s & PE’s Question For Thought And Review 1.

Is the Fed A private of public agency?

2.

Why are there few regional Fed banks in the western part of the United States?

4. to

Name the 3 tools the Fed has to affect the money supply and explain how the Fed would use each tool increase the money supply.

5.

What happens to interest rates and the price of bonds when the Fed buys bonds?

6.

Define the Federal funds rate and explain why it is the interest rate that the Fed most directly controls.

9.

Investment increases by 20 for each interest rate drop of 1%. The expenditures multiplier is 3. If the money multiplier is 4, and each change of 5 in the money supply changes the interest rate by 1%, what open market policy would you recommend to increase income by 240?

10.

If the nominal interest rate is 6% and inflation is 5%, what’s the real interest rate?

14.

Target inflation is 2%; actual inflation is 3%. Output equal potential output. What does the Taylor rule predict will be the Fed funds rate?

Problems And Exercises 1.

Demonstrate the effect of expansionary monetary policy in the AS/AD model when the economy is: a. Below potential output

b.

Significantly above potential output

2. The Fed wants to increase the money 4,000) by 200. The money multiplier is 3 and 1% point the discount rate falls, banks borrow an the Fed can achieve its goal using the following a. Change the reserve b.

Change the discount rate.

c.

Use open market operations.

supply (which is currently people hold no cash. For each additional 20. Explain how tools: requirement.

7. State the Taylor rule. What does the rule predict will happen to the Fed funds rate in each of the following situations? a. Inflation is 2%, the inflation target is 3% and output is 2 % below potential output

8.

b.

Inflation is 4%, the inflation target is 2% and output is 3 % above potential output

c.

Inflation is 4%, the inflation target is 3% and output is 2 % below potential output

Congratulations! You have been approved advisor to the Federal Reserve Bank a. The FOMC decides that it must increase the MS by 60. Committee members tell you the reserve ratio is .1 and the cash-to-deposit ratio is .3. They ask you what directive they should give to the open market desk. You tell them, being as specific as possible, using the real-world money multiplier. b.

They ask you for two other ways they could have achieved the same end. You tell them.

c. of

Based on the quantity theory of money, tell them what you think the effect on the price level your policy will be.