MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 13, Problem 4DQ
To determine
To discuss: The methodology with which the Fed reduced the federal funds rate using a diagram.
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Briefly describe how the Fed would use its three main policy tools to stimulate the economy.
(1) The Fed should increase or decrease the benchmark rates such as Fed funds rate? Briefly explain Why.
(2) The Fed should buy or sell Treasury securities? Briefly explain Why.
(3) The Fed should increase or decrease the bank reserve requirement ratio? Briefly explain Why.
If the Fed has announced that it plans on increasing the interest rate it will
Why can’t the Fed target both the money supply and the interest rate at the same time?
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- A news website might have this headline: “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent.” A more detailed account of the Fed’s action would say: “Today the Fed told its bond traders to sell enough bonds in open-market operations to make the federal funds rate decrease to 5.25 percent.” “Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.” “Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.” “Today the Fed told its bond traders to buy enough bonds in open-market operations to make the federal funds rate decrease to 5.25 percent.”arrow_forwardThe Federal Reserve helps determine interest rates for the entire economy. Answer the following questions below. How does the Fed stimulate the economy? How does the Fed affect interest rates? Does the Fed have complete control over U.S. interest rates? That is, can it set rates at any level it chooses? Why or why not? Do you think that the Fed should control interest rates or let the free market set the rates? What are the pros and cons of having the Fed or free-market determine interest rates?arrow_forwardIf bondholders expect the Fed to raise interest rates, what action might they take? How would this affect the Fed’s goal?arrow_forward
- When economists speak of the "zero lower bound problem" that the Fed sometimes faces, what are they referring to? 1. It is when short term interest rates are close to zero meaning the Fed can no longer use changes in interest rates to stimulate the economy 2. It is when economic growth in the economy has reached zero percent and the Fed must use aggressive monetary policy 3. It is when the Fed has sold all the securities on its balance sheet and can no longer impact the money supply using open market operations 4. It is when banks choose to hold no excess reserves, making it impossible for the Fed to lower the discount ratearrow_forwardWhat was the actual federal funds rate set by the Fed in 2021? Was monetary policy expansionary or contractionary? Briefly explain.arrow_forwardWhy did the Federal Reserve lower interest rates? What other measures can the Federal Reserve take to help the economy? What is the impact of lowering interest rates on the economy?arrow_forward
- Targeting the federal funds rate ( is, is not ) as important a tool today as it was before the 2007-2009 financial crisis. During the financial crisis when the federal funds rate was near zero, the Fed ( did, did not ) wish to go lower than zero and came up with alternatives to influence interest rates and lending: the administered rates. Today, the Fed still sets a target for the federal funds rate but finds it more effective to change the administered rates. By doing that, the Fed can stimulate or restrict lending. The federal funds rate is the Feds policy rate and (is, is not ) useful when providing forward guidance. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardInterest rates have been changing dramatically. Do you expect interest rates to continue to change? Which way do you think they will move – up or down? In general, comment on why the Federal Reserve changes interest rates (or adjusts the discount rate). What is the Federal Reserve trying to do if it “cuts interest rates” and what is it trying to do if it “raises interest rates”?arrow_forward2. The theory of liquidity preference and the downward-slopingaggregate demand curve The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. 12 Money Supply 10 Money Demand Money Supply MD1 2 MD2 10 20 30 40 50 60 MONEY (Billions of dollars) INTEREST RATE (Percent)arrow_forward
- The graph shows the demand curve for reserves in the market for bank reserves. 8.00- Federal funds rate (percent per year) The federal funds target rate is 4 percent. Draw the supply of reserves curve determined by the Fed to achieve the federal funds target rate. Label it. 7.00- Draw a point at the equilibrium in the market for bank reserves. 6.00- 5.00- 4.00- 3.00- 2.00- 0 25 50 75 RD 100 Reserves on deposit at the Fed (billions of dollars) >>> Draw only the objects specified in the question. ☑arrow_forwardRead the scenario below and answer teh question that follows. The Federal Reserve Board announced an emergency rate cut on Sunday, March 15, lowering interest rates to near zero. This rate cut comes less than two weeks after the Fed cut interest rates by half a point and marks continued effort to minimize the economic impact of the coronavirus (COVID-19). Source: https://www.cnbc.com/select/impact-of-fed-rate-cut-amid-coronavirus-concerns/ A decrease in the rate of interest: A. Lowers the opportunity cost of money and leads to an increase in the quantity of money demanded. O B. Raises the opportunity cost of money and leads to a decrease in the quantity of money demanded. O C. Raises the opportunity cost of money and leads to an increase in the quantity of money demanded. O D. Lowers the opportunity cost of money and leads to a decrease in the quantity of money demanded.arrow_forwardWhile a television news reporter might state that “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent,” a more precise account of the Fed’s action would be as follows: “Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent.” “Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.” “Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.” “Today the Fed took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent.”arrow_forward
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