from December 2015 through December 2018, , the Fed raised the target level for the federal funds rate nine times. While short-term interest rates increased substantially, long-term rates increased only slightly (making the yield curve flatter, or even inverted). Show and explain why short-term and long-term interest rates have not moved together

from December 2015 through December 2018, , the Fed raised the target level for the federal funds rate nine times. While short-term interest rates increased substantially, long-term rates increased only slightly (making the yield curve flatter, or even inverted). Show and explain why short-term and long-term interest rates have not moved together

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter19: Money Creation

Section: Chapter Questions

Problem 13SQ

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The Federal Reserve Board of Governors has the power to raise or lower short-term interest rates. Between 2005 and 2006, the Fed aggressively increased the benchmark federal funds interest rate from 2.5 percent in February 2005 to 5.25 percent in June 2006, where it remained until July 2007. From July 2007 to December 2008, the Fed rapidly decreased the federal funds rate, where it dropped to 0.16 percent and remained between 0.07 percent and 0.20 percent through November 2015, after which it again began to rise. Assuming that other interest rates also increased and then decreased along with the federal funds rate, what effects do you think those moves had on investment spending in the economy? Explain your answer. What do you think the Fed’s objective was in increasing and then decreasing the federal funds rate? When and why might the Fed decide to start raising the federal funds rate?
There are a number of theories that attempt to explain the observed facts concerning yield curves. First, explain these observed facts. Next, explain the theories that have been developed to account for these facts. Feel free to use the current yield curve to illustrate our answer. Finally, from December 2015 through December 2018, , the Fed raised the target level for the federal funds rate nine times. While short-term interest rates increased substantially, long-term rates increased only slightly (making the yield curve flatter, or even inverted). Show and explain why short-term and long-term interest rates have not moved together
the Fed began implementing QE4 in March 2020. Use the federal funds market, the AD-AS model, and the yield curve, show and explain how QE4 is supposed to impact short and long term interest rates, as well as P, Y, and N. Discuss why QE4 may not work as advertised. In other words, what are the limitations of QE?
After the press conference that followed the Federal Open Market Committee meeting on June 19, 2013, there were reports in the media that Chairman Bernanke's comments were a signal that the Fed would raise interest rates sooner than expected. As a result, the yield on 10-year U.S. Treasury notes rose to almost 2.6%, the highest level since August 2011. a) Comment on how this would affect the IS curve.
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2) During the financial crises and recession of 2007-09, the Fed lowered the federal funds rate target to 0-0.25%. However, long-term interest rates, like mortgage rates, were still fairly high. One thing the Fed did to lower long-term rates was that the Fed : A) bought long-term bonds B) lowered the long-term interest rates by lowering the reverse repo rate C) lowered the long-term interest rates by lowering the discount rate D) sold long-term bonds
In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a “soft patch” in the economy, in particular the possibility of a deflation. As a result, the Fed proactively lowered the federal funds rate from 1.75% in late 2002 to 1% by mid-2003, the lowest federal funds rate on record up to that point in time. In addition, the Fed committed to keeping the federal funds rate at this level for a considerable period of time. This policy was considered highly expansionary and was seen by some as potentially inflationary and unnecessary. a. How might fears of a zero lower bound justify such a policy, even if the economy was not actually in a recession? b. Show the impact of these policies on the MP curve and the AD/AS graph. Be sure to show the initial conditions in 2003 and the impact of the policy on the deflation threat.
The following graph shows a hypothetical demand function for federal funds. Currently, the total amount of reserves in the banking system is $50 billion, the discount rate is 3.5 percent, and interest on reserves equals IOR = 1 percent. If demand for federal funds increases by $40 billion, the equilibrium fed funds rate will equal: Federal Funds Rate (FFR) 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% SO $10 O a. FFR = 3.00% Ob. FFR = 3.50% O c. FFR = 4.00% d. FFR = 4.50% Oe. None of the above. $20 $30 $40 $50 $60 570 580 $90 $100 $110 $120 $130 $140 Bank Excess Reserves (SBillion)
There are three factors that can affect the shape of the Treasury yield curve (r*t, IPt, and MRP,) and five factors that can affect the shape of the corporate yield curve (r*t, IPt, MRP, DRPt, and LP). The yield curve reflects the aggregation of the impacts from these factors. Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that the US Treasury yield curve can take. Check all that apply. Inverted yield curve Downward-sloping yield curve Upward-sloping yield curve Identify whether each of the following statements is true or false. Statements If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. (Assume MRP = 0.) All else equal, the yield on new bonds issued by a leveraged firm will be less than the yield on the new…
The U.S. money supply (M1) at the beginning of 2015 was $2,683.3 billion broken down as follows: $1,165.7 billion in currency, $3.5 billion in traveler's checks, and $1,514.1 billion in checking deposits. Suppose the Fed decided to increase the money supply by decreasing the reserve requirement from 11 percent to 10 percent. Assume all banks were initially loaned up (had no excess reserves) and the quantity of currency and traveler's checks held outside of banks did not change. How large a change in the money supply would have resulted from the change in the reserve requirement? The money supply would change by $ billion. (Round your response to two decimal places and include a minus sign if necessary.)
Outline the ways in which FED easing affects the yield curve (include the theories of the yield curve as part of this). Is it possible for an increase in the real money supply (FED easing) to have exactly the opposite effect? Explain the basis for why this is or is not possible.
When the Fed embarked on a policy known as quantitative easing, they slowly lowered the federal funds rate target until it was equal to zero. they reduced the required reserve ration by one-quarter point per month for 12 months. bought longer-term securities than are usually bought in open market operations. opened up lending to primary dealers, commercial banks, and investment banks.