Macroeconomics
13th Edition
ISBN: 9780134744452
Author: PARKIN, Michael
Publisher: Pearson,
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Question
Chapter 14, Problem 24APA
(a)
To determine
Identify the impact of the instruction given by the Federal Reserve Act of 2000 to the Fed.
(b)
To determine
Identify why the Fed increased the money more than the potential level to increase the production.
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What is the expected impact of a decline in the money supply to the US economy?
A.
Higher aggregate prices (inflation)
B.
Lower aggregate prices (deflation)
C.
There is no general relationship between the money supply and inflaton
When the Federal Reserve conducts an expansionarymonetary policy, what happens to the money supply?How does this affect the supply of dollar assets?
In today's interconnected world, many central banks communicate regularly and frequently with the public about the state of the economy, the economic outlook, and the likely future course of monetary policy. Communication about the likely future course of monetary policy is known as "forward guidance.". If the central bank increases the reserve ratio, as the market has perfectly expected, which of the following will surely happen?
a. The short run economic output will be deviating from its potential output
b. The prevailing price level of goods and services in that country will fall
c. The level of potential output will be shifting to the left
d. None of the following will happen for sure
Chapter 14 Solutions
Macroeconomics
Ch. 14.1 - Prob. 1RQCh. 14.1 - Prob. 2RQCh. 14.1 - Prob. 3RQCh. 14.1 - Prob. 4RQCh. 14.2 - Prob. 1RQCh. 14.2 - Prob. 2RQCh. 14.2 - Prob. 3RQCh. 14.3 - Prob. 1RQCh. 14.3 - Prob. 2RQCh. 14.3 - Prob. 3RQ
Ch. 14.3 - Prob. 4RQCh. 14.4 - Prob. 1RQCh. 14.4 - Prob. 2RQCh. 14.4 - Prob. 3RQCh. 14.4 - Prob. 4RQCh. 14.4 - Prob. 5RQCh. 14 - Prob. 1SPACh. 14 - Prob. 2SPACh. 14 - Prob. 3SPACh. 14 - Prob. 4SPACh. 14 - Prob. 5SPACh. 14 - Prob. 6SPACh. 14 - Prob. 7SPACh. 14 - Prob. 8SPACh. 14 - Prob. 9SPACh. 14 - Prob. 10SPACh. 14 - Prob. 11SPACh. 14 - Prob. 12SPACh. 14 - Prob. 13SPACh. 14 - Prob. 14SPACh. 14 - Prob. 15SPACh. 14 - Prob. 16APACh. 14 - Prob. 17APACh. 14 - Prob. 18APACh. 14 - Prob. 19APACh. 14 - Prob. 20APACh. 14 - Prob. 21APACh. 14 - Prob. 22APACh. 14 - Prob. 23APACh. 14 - Prob. 24APACh. 14 - Prob. 25APACh. 14 - Prob. 26APACh. 14 - Prob. 27APACh. 14 - Prob. 28APACh. 14 - Prob. 29APACh. 14 - Prob. 30APACh. 14 - Prob. 31APACh. 14 - Prob. 32APACh. 14 - Prob. 33APACh. 14 - Prob. 34APACh. 14 - Prob. 35APACh. 14 - Prob. 36APACh. 14 - Prob. 37APACh. 14 - Prob. 38APACh. 14 - Prob. 39APACh. 14 - Prob. 40APACh. 14 - Prob. 41APA
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- The economy of Carlsberg is presently in equilibrium, but is suffering a recession as depicted in the graph below. The central bank of Carlsberg is introducing an expansionary monetary policy to get the economy back to the full-employment level of real GDP. Price index 180 160 140 120 100 80 (440, 80) 60 420 430 440 450 460 470 480 490 500 Real GDP (in billions) AS AD LAS a. What increase in aggregate demand is necessary to achieve this? billions. b. If successful, what will be the growth rate? Round your answer below to 2 decimal places. 1% c. If successful, what will be the inflation rate? Round your answer below to 2 decimal places. 1%arrow_forwardSuppose the economy is in long-run equilibrium with GDP approaching $23T and the unemployment rate is approaching 4%. Now, let's say that the Fed has decided to decrease the money supply by 6%! The Fed proposes this move by raising the Prime Rate from the current 3.25 to 4.00 and to sell a new trunk or class of 30-year Treasury Bonds. This was not expected! What might be the short and long run effects on the economy as a whole if this were to take place? What happens to the inflation rate? What happens with unemployment? Like I said, this was actually expected that the Fed might take some sort of constriction action to stave off reduce inflation and to strengthen the money supply. However, President Biden, Congress and the Treasury Department had hoped for no contraction of the money supply until 2023.arrow_forwardexplain if the central bank pursues targeting the interest rate, it is likely to lossse control over a monetary aggregate.arrow_forward
- Consider the following scenario: a. In Argentina, the central bank needs to determine by how much to increase the money supply next year. Suppose they estimate an increase in the overall economic activity (real GDP) of 2.5% percent and have a target inflation rate of 4%. The velocity of money has been observed to be constant over the past many years. By what level should the central bank change the money supply to achieve its inflation target? b. Next year, the central bank of Argentina wishes to reduce inflation to 2 percent, and estimates an increase in real GDP by 1.5 percent. What should be the change in the money supply? c. What is an "inflation tax", and how might it explain the creation of inflation by a central bank?arrow_forwardWhy does having a dual mandate complicate policy making at a central bank like the FED? Why do some people say that the FED also has a third mandate? If the FED can only directly control nominal interest rates, how does the FED influence real interest rates that determine the actual stance of monetary policy? What circumstances or issues created the need for modern monetary policy?arrow_forward"If a central bank's desired intermediate target is a monetary aggregate (money supply), then its policy instrument will most likely be a reserve aggregate variable like the monetary base." Explain this based on the conduct of monetary policy in practice.arrow_forward
- Which monetary policy tool can the Federal Reserve use to conduct an expansionary monetary policy (please state at least one instrument)? Which monetary policy instrument can the Fed use to conduct a restrictive monetary policy? Assume the country is experiencing high unemployment and a recession, such as during 2001, 2008-2009, and 2020. What is the Fed likely to do in this scenario? Discuss the effects of such policy on the economy. Can you give a specific example to what the Fed did during any of those recessions?arrow_forwardExplain the relationship between the effectiveness of monetary policy and the interest elasticity of money demand. Will the monetary policy be more or less effective the higher the interest elasticity of money demand? Explain.arrow_forwardTwo tools the Federal Reserve would use to implement the decision to increase the federal funds would be Open market operations and the IOER rate. Show in a graph of the federal funds market the effect the tools mentioned above have on this market. What effect do the two tools used have on the interest rates faced by firms and households? What do you expect to happen to the money supply? What do you expect to happen to the inflation rate? How would you expect all these decisions to affect employment in the economy? How do the effects on the money supply and inflation rate align with what the Fed was hoping to attain(to achieve maximum employment and inflation at the rate of 2 percent over the longer run)?arrow_forward
- Money supply versus interest rate targets. assume that the economy's real GDP is growing. a. What will happen to money demand over time? b. If the Fed leaves the money supply unchanged, what will happen to the interest rate over time? c. If the Fed changes the money supply to match the change in money demand, what will happen to the interest rate over time? d. What would be the effect of the policy described in part (c) on the economy's stability over the business cycle?arrow_forward"Considering the Taylor Rule for monetary policy, which action would a central bank most likely take if the actual inflation rate is below the target inflation rate and the real GDP is above the potential GDP? A) Increase the interest rate to reduce inflation. B) Decrease the interest rate to stimulate inflation. C) Keep the interest rate unchanged, as the effects on inflation and GDP are offsetting. D) Increase the money supply to reduce the real GDP to its potential level.arrow_forwardExplain and demonstrate diagrammatically what happens to aggregate demand, if the Federal Bank sells government bonds to the public, using the money supply diagramarrow_forward
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