Consider the US economy in the last couple years, in particular before the current crisis impacted the economy. An important issue in the last couple years was the possible scenarios and escape paths for the FED from quantitative easing. a. Because the economy was heating up, banks begin to reduce the ratio of reserves relative to deposits (i.e. they lend out a larger fraction of their deposits.) Describe and illustrate how this will affect (i) the money supply and (ii) aggregate demand (if at all). b. Assuming no policy intervention, describe what happens to inflation and output in the short and in the long run. c. Suppose that the FEDs objective is to stabilize the price level at the level prior to the economy heating up. Should it intervene in response to banks changing their lending decisions? How could the FED intervene via open market operations? d. In conjunction with open market operations, the FED decides to change the amount of interest it pays on reserves. How would it want to change the interest rate it pays on reserves? How would this affect banks' lending decisions? Would this affect the monetary base or the money multiplier?

a. List the three main tools of monetary policy used by the Fed and briefly describe how each of the tools impacts the money supply and interest rates. b. Give examples of both restrictive and easy monetary policy.

Hi, can someone help me with this question? Thank you in advance. 1. Suppose the Central Bank has just announced a higher overnight interest rate, thereby decreasing the desire for new loans. A commercial bank is holding excess reserves and wants to buy $46,000 of government bonds from the CB (which they are willing to sell).  a. What is the immediate change in the Central Bank’s assets and liabilities?  b. What is the immediate change in the commercial bank’s assets?

1. For the each of the following, use the supply and demand of reserves diagram to make the necessary changes, describe the type of policy that the Fed would need to conduct (if any) and indicate what happens to the market (effective) federal funds rate. (In all scenarios, you can assume that the "normal" starting equilibrium, that is, where vertical portion of supply curve intersects demand at its downward sloping portion.) a. Holiday shopping season causes banks to increases holdings of excess reserves. The Fed decides not to react. As an example, answer is already given below. FER In this case demand for reserves would increase pushing federal funds rate up. b. Holiday shopping season causes banks to increases holdings of excess reserves. The Fed decides to react to keep the federal funds rate at the target. c. FOMC raises the target federal funds rate and NY Fed conducts necessary operations to achieve it. d. Fed decides to raise interest rate on reserve balances above the current…