Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 14, Problem 15CQ
To determine
Identify the impact of near-zero interest rate of 2009–2015 on the incentive of holding money.
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How do changes in interest rates impact consumer spending, business investment, and overall economic activity, and how does the central bank use interest rates as a tool of monetary policy? A) Changes in interest rates have no effect on economic activity. B) Lower interest rates typically encourage consumer borrowing and business investment, stimulating economic activity. The central bank uses interest rate adjustments as a tool to influence borrowing and spending. C) Higher interest rates boost economic activity by increasing consumer savings. D) Changes in interest rates only affect government spending.
part-a: What is the relationship between the price level in a country and the value of money in that country?
part-b: What is the impact of an expansionary monetary policy (such as a central bank lowering required reserve ratios) on the inflation rate and the value of money? What is the impact of a contractionary monetary policy (such as a central bank increasing required reserve ratios) on the inflation rate and the value of money?
part-c: What is the classical dichotomy of nominal and real variables? How is the classical dichotomy related to the neutrality of money?
part-d: Why is inflation referred to as a tax on holding money?
part-a: What is the relationship between the price level in a country and the value of money in that country?
part-b: What is the impact of an expansionary monetary policy (such as a central bank lowering required reserve ratios) on the inflation rate and the value of money? What is the impact of a contractionary monetary policy (such as a…
Suppose a country’s inflation level is higher than desired, and unemployment levels are lower than expected – the central bank decides that the economy is ‘overheated’ and attempts to use the appropriate monetary policy to deal with the situation. Describe, with the help of the appropriate figure, how a central bank might go about implementing such monetary policy, the subsequent effects this has on interest rates, the quantity of money in the market, and the process through which this affects the level of expenditure in the economy.
Chapter 14 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- In this Decision Point activity you learned about how changes to monetary policy by the Federal Reserve should impact your own decisions and the decisions of everyone across the economy. Apply what you learned in this decision point to the following questions. One of the tools the Fed uses to influence interest rates is to pay banks interest on excess reserves they hold overnight with the Fed. You're a director at a bank. Your bank currently holds $185 million in excess reserves at the regional Fed and you're earning an annual rate of 2.42% on those excess reserves sitting at the Fed. The Fed decides to decrease the interest rate it pays on excess reserves from an annual rate of 2.42% to 1.55%. In response, you should the amount of excess reserves held at the Fed and make any given interest rate. loans atarrow_forwardMonetary policy isn't always effective: Why couldn't monetary policy pull us out of the Great recession? The Great Recession officially lasted from December 2007 to June 2009. But the effects lingered on for several years thereafter, with slow growth of real GDP and high unemployment rates. These effects all occurred despite several doses of expansionary monetary policy. Not only did the Fed push short- term interest rates to nearly 0%, but it also engaged in several rounds of quantitative easing, purchasing hundreds of billions of dollars' worth of long-term bonds. Therefore, what are three possible reasons why monetary policy was not able to restore expansionary growth during and after the Great recession?arrow_forwardMonetary policy isn’t always effective: Why couldn’t monetary policy pull us out of the Great recession? The Great Recession officially lasted from December 2007 to June 2009. But the effects lingered on for several years thereafter, with slow growth of real GDP and high unemployment rates. These effects all occurred despite several doses of expansionary monetary policy. Not only did the Fed push short-term interest rates to nearly 0%, but it also engaged in several rounds of quantitative easing, purchasing hundreds of billions of dollars’ worth of long-term bonds. Therefore, what are three possible reasons why monetary policy was not able to restore expansionary growth during and after the Great recession?arrow_forward
- What direction of change in velocity could explain the price level increasing by a smaller percentage than the money supply? What would this change in velocity imply about the frequency with which money changes hands?arrow_forwardConsider the following scenario: a. In Argentina, the central bank needs to determine by how much to increase the money supply next year. Suppose they estimate an increase in the overall economic activity (real GDP) of 2.5% percent and have a target inflation rate of 4%. The velocity of money has been observed to be constant over the past many years. By what level should the central bank change the money supply to achieve its inflation target? b. Next year, the central bank of Argentina wishes to reduce inflation to 2 percent, and estimates an increase in real GDP by 1.5 percent. What should be the change in the money supply? c. What is an "inflation tax", and how might it explain the creation of inflation by a central bank?arrow_forwardHow does the concept of velocity of money relate to the quantity theory of money, and what factors can influence the velocity of money in an economy? A) The velocity of money has no connection to the quantity theory of money. B) The velocity of money represents the rate at which money changes hands in the economy and is a key factor in the quantity theory of money; factors like consumer confidence and banking practices can influence it. C) The velocity of money measures the total money supply in an economy and is unrelated to the quantity theory of money. D) The velocity of money is determined solely by government policies.arrow_forward
- In an economy where the central bank has implemented a digital currency alongside traditional monetary mechanisms, analyze the potential impact on the velocity of money and the implications for monetary policy effectiveness, especially in the context of counter-cyclical measures during economic downturns. How might this transformation influence the liquidity preference of households and firms?arrow_forwardWhy would a central bank implement a monetary policy when the inflation level is higher than desired, and unemployment levels are lower than expected? Describe how a central bank might go about implementing such monetary policy, the subsequent effects this has on interest rates, the quantity of money in the market, and the process through which this affects the level of expenditure in the economy.arrow_forwardWhy don't economists agree with backing paper money with a certain commodity, such as gold? Supplies of commodities like gold can change (expectedly, unexpectedly ). A sudden increase in the availability of a commodity could (increase, decrease) the money supply too quickly and trigger inflation. If the government backed the currency with gold, then the money supply ( would, would not ) vary with the availability of gold. A persistent scarcity of a commodity could (increase , reduce ) the money supply too much and cause a recession and unemployment.arrow_forward
- New concepts like stablecoins, central-bank digital currencies, NFTs, really calls into question the future of money and investing. How are these things going to develop? Will they coexist in the marketplace at some point in time? And what roles will they play in the commercial marketplace? And whether these developments in the marketplace will address the challenges of inclusiveness in a country like India. Explain its impact on money supply.arrow_forwardThe Federal Reserve manages the amount of money in circulation by buying or selling U.S. Treasury securities, usually Treasury bills. The increase or decrease of money in circulation helps the Fed to control inflation or deflation. This has an effect on your disposable income. Research the Federal Reserve system and money supply, then answer the following questions. Under what conditions would the Fed choose to decrease the money supply, how would it do so, and what is the goal of doing so? How does the Fed factor inflation into its actions?arrow_forwardBetween 1950 and 1975, the average annual rate of change in the money supply was slightly less than 4 percent. Has the Fed expanded the money supply more (or less) rapidly than this 4 percent long-term rate during the past 12 months? The past 24 months? Is the Fed's current monetary policy restrictive or expansionary? Explain.arrow_forward
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