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?

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?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

The graphs attached shows the effect of a decrease in economic activity on the money market and another showing the impact of the policy below: Interest rates on credit cards would be lowered on starting from 10% to 17% of the current rates. More such declines in credit card interest rates for smaller firms and impacted persons have been proposed by institutions. a) For the second graph which shows the impact of the policy, please explain it using 2-3 paragraphs.
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?
i need to know all the formulas
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…
Hi, can I get help with this question I'm not sure what to choose? I'm confused base on the graph and I'm not quite sure what statement is accurate. The graph is in the attachments with download data. Here's the question: Why is it important for the central bank to be independent from the part of the government responsible for spending? A. The Federal Reserve is, historically, driven by political ideologies. Allowing it to influence the rest of government could harm its ability to enact effective monetary policy. B. If not independent, the government might be tempted to have the central bank print more money (creating inflation) whenever the government runs a budget deficit. C. If not independent, the government might be tempted to have the central bank print more money (creating deflation) whenever the government runs a budget surplus.
Explanation it correctly
This question is about the money market and the workings of central bank. a. How a central bank uses the open market operations (OMO) to increase or decrease money supply? b. What kind of relationship exist between an asset’s price and rate of return? Explain why. c. Please write a “real money demand function” and show and explain what are the main determinants of money demand with the signs (- or +) of each factor. d. Is the money demand function that you wrote in part (c) same with “the Cambridge money demand function”? Explain if there is a difference between the two. e. What the quantity theory of money (QTM) says about the relationship between money supply and the price level? Explain
2.2
The Fed’s bond holdings increased from $900 billion in 2009 to $4.5 Trillion in 2016. The purpose of the Fed’s decision to increase its bond holdings from 2009 to 2016 was to A. to decrease the reserves in the banking system thus engaging in so called “contractionary monetary policy” needed to contract the level of inflation B. contract the money supply to counteract the high rates of unemployment then existing in the United States C. increase the reserves in the banking system to increase bank lending and aggregate demand. D. engage in expansionary fiscal policy
During the economic crisis of the 1970s, the economy was suffering from high levels of inflation. During this period, suppose The Fed used open market operations as a part of a tight money (contractionary) monetary policy. Explain and graphically illustrate the problem, and the effects of the monetary policy on the market for reserves, the market for M1, and the market for real goods and services.
Figure 31-3 On the following graph, MS represents the money supply and MD represents money demand. VALUE OF MONEY 0.6 0.45 5000 MS, MS 9000 QUANTITY OF MONEY MD Refer to Figure 31-3. Which of the following events could explain a shift of the money-supply curve from MS₁ to MS2? An increase in the value of money A decrease in the price level An open-market purchase of bonds by the Federal Reserve The Federal Reserve sells bonds