Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781305971509
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 21, Problem 3CQQ
To determine
Role of interest rate targets in Fed policy.
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The federal funds rate is
the interest rate the Fed charges commercial banks.
the interest rate a bank charges its best customers.
the interest rate banks charge each other for overnight loans.
the interest rate on a Treasury Bill.
The Fed’s target for the federal funds ratea. is an extra policy tool for the central bank, inaddition to and independent of the money supply.b. commits the Fed to set a particular money supplyso that it hits the announced target.c. is a goal that is rarely achieved because the Fedcan determine only the money supply.d. matters to banks that borrow and lend federalfunds but does not influence aggregate demand.
Suppose that the Bank of Canada determines that the Canadian economy is currently overproducing. What can the Central Bank do to slow down economic activity?
a. The Central bank can pursue an expansionary monetary policy by increasing the money supply, causing a decrease in the interest rate. As a result, real GDP will increase and the price level will increase.
b. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing a decrease in the interest rate. As a result, real GDP will decrease and the price level will decrease
c. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing an increase in the interest rate. As a result, real GDP will decrease and the price level will decrease.
d. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing an increase in the interest rate. As a result, real GDP will decrease and the price level will increase
e. The…
Chapter 21 Solutions
Principles of Macroeconomics (MindTap Course List)
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- When the Fed targets the amount of money in the economy, interest rates become more variable. True Falsearrow_forwardIf the Fed opts to employ open market operations to increase the money supply, then a.The Fed will have to compensate for this change by increasing the discount rate b.Bond rates will increase because the Fed must buy Treasury bonds from individuals in the market, and this will cause the demand for these bonds to increase c.Banks will petition the Fed to increase the federal funds rate to recoup their losses d.Government budget surpluses will be more likely to achieve e.Bank reserves will decrease as consumers withdraw funds to purchase more Treasury Bonds and this will have an effect on the money supply via the money multiplierarrow_forwardASAP When the economy is in recession and the Fed wants to do expansionary policy, explain what all 4 types of policies they could undertake.arrow_forward
- Economics If the Fed increases the monetary base by $73 million and the money multiplier is 1.6, money supply will increase by $______ million.arrow_forward(a) The Federal Reserve Bank of the United States (i.e., the Fed) is responsible for financing the operations of the federal government. True or false? Explain. (b) Changes in reserve requirements are an effective monetary policy tool that the Fed uses frequently to control the money supply. True or false? Explain.arrow_forwardMonetary Policy - End of Chapter Problems Ther Fed creates a lower and upper bound for the federal funds rate and the incentives that drive financial institutions to move the federal funds market to that target. a. Select the tool(s) the Fed uses to incentivize financial institutions to move the federal funds market to the targeted federal funds rate. The Fed buys and sells government bonds. borrows money overnight from financial institutions. Incorrect b. Select the tool(s) the Fed uses to create a lower bound for the federal funds rate. The Fed borrows money overnight from financial institutions. lends directly to banks through the discount window. Incorrect pays banks interest on excess reserves. lends directly to banks through the discount window. The Fed c. Select the tool(s) the Fed uses to create an upper bound for the federal funds rate. pays banks interest on excess reserves. lends directly to banks through the discount window. pays banks interest on excess reserves. borrows…arrow_forward
- If the Fed sells bonds, which of the following should increase? Select all that apply. The interest rate. The price level. OM1. The monetary base. Investment. GDP.arrow_forwardRead the event The Federal Reserve raises reserve requirements. What would likely result from this event? A. An economy would see a slight decrease in aggregate demand. B. Interest rates on loans decline. C. Consumer demand would increase thus increasing prices. D. Inflation would reach levels that are acceptable for full employment.arrow_forwardWhen the Fed buys government bonds, a- the money supply decreases and the federal funds rate increases. b- the money supply decreases and the federal funds rate decreases. c- the money supply increases and the federal funds rate decreases. d- the money supply increases and the federal funds rate increases.arrow_forward
- Which one of these policies should the Fed engage in if unemployment is very high and inflation is under control? Select one: a. Buy government bonds through an Open Market Operation b. Print more money and give it directly to tax payers c. Lower corporate and income taxes d. Raise the discount rate e. Lower consumer confidencearrow_forwardWhen the Fed conducts an open market sale, it leads to a higher level of investment and output in the economy. True False Click to select your answer.arrow_forwardThe Fed typically increases the money supply by selling government bonds buying government loans selling government loans printing more currency buying government bondsarrow_forward
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