Macroeconomics
13th Edition
ISBN: 9780134744452
Author: PARKIN, Michael
Publisher: Pearson,
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Chapter 14, Problem 32APA
To determine
Identify the influence of the federal funds rate on the long-term real interest rate.
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Find readings or videos on the internet with information on the factors that move the demand and
supply curves of bonds, their effect on interest rates. Answer the following questions:
1. One way the Fed decreases the money supply is by selling bonds to the public. Using supply
and demand analysis for bonds, show what effect this action has on interest rates.
2. Using the supply and demand of bonds, show why interest rates are pro-cyclical (they increase
when the economy is expanding and decrease during recession).
3. What effect can a sudden increase in gold price volatility have on interest rates?
4. Using a supply and demand analysis for bonds, show the effect on interest rates when the risk
of the bond increases.
why does selling bonds by the Treasury to the financial market raise interest rates
what is the formula for the rate on long-term Treasury bonds?
Chapter 14 Solutions
Macroeconomics
Ch. 14.1 - Prob. 1RQCh. 14.1 - Prob. 2RQCh. 14.1 - Prob. 3RQCh. 14.1 - Prob. 4RQCh. 14.2 - Prob. 1RQCh. 14.2 - Prob. 2RQCh. 14.2 - Prob. 3RQCh. 14.3 - Prob. 1RQCh. 14.3 - Prob. 2RQCh. 14.3 - Prob. 3RQ
Ch. 14.3 - Prob. 4RQCh. 14.4 - Prob. 1RQCh. 14.4 - Prob. 2RQCh. 14.4 - Prob. 3RQCh. 14.4 - Prob. 4RQCh. 14.4 - Prob. 5RQCh. 14 - Prob. 1SPACh. 14 - Prob. 2SPACh. 14 - Prob. 3SPACh. 14 - Prob. 4SPACh. 14 - Prob. 5SPACh. 14 - Prob. 6SPACh. 14 - Prob. 7SPACh. 14 - Prob. 8SPACh. 14 - Prob. 9SPACh. 14 - Prob. 10SPACh. 14 - Prob. 11SPACh. 14 - Prob. 12SPACh. 14 - Prob. 13SPACh. 14 - Prob. 14SPACh. 14 - Prob. 15SPACh. 14 - Prob. 16APACh. 14 - Prob. 17APACh. 14 - Prob. 18APACh. 14 - Prob. 19APACh. 14 - Prob. 20APACh. 14 - Prob. 21APACh. 14 - Prob. 22APACh. 14 - Prob. 23APACh. 14 - Prob. 24APACh. 14 - Prob. 25APACh. 14 - Prob. 26APACh. 14 - Prob. 27APACh. 14 - Prob. 28APACh. 14 - Prob. 29APACh. 14 - Prob. 30APACh. 14 - Prob. 31APACh. 14 - Prob. 32APACh. 14 - Prob. 33APACh. 14 - Prob. 34APACh. 14 - Prob. 35APACh. 14 - Prob. 36APACh. 14 - Prob. 37APACh. 14 - Prob. 38APACh. 14 - Prob. 39APACh. 14 - Prob. 40APACh. 14 - Prob. 41APA
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- Fed Cuts Key Interest Rate Again Washington, DC—Alarmed by the rapidly weakening economy, the Federal Reserve cut a key interest rate again yesterday. The Fed cut the discount rate, dropping it from 2.75 percent at the beginning of the year to a mere 0.25 percent now. The discount rate is the rate the Fed charges for loans it makes to private banks. By dropping the rate, the Fed is hoping banks will borrow more money, then use that money to make new loans to businesses and consumers. What has spooked the Fed is that GDP is falling at the fastest rate in 50 years. The Fed is hoping that record low interest rates will prompt more spending, preventing a protracted recession. If every one-point change in the federal funds rate alters aggregate demand by $180 billion, how far would AD shift in response to the interest rate cuts?arrow_forward12 Reducing the Fed’s Balance Sheet by Selling Mortgage-Backed Securities. Suppose the Fed wanted to reduce its balance sheet and decided to sell its mortgage-backed securities instead of its holding of government bonds. What types of interest rates would you expect to see increase? (Related to Application 1 on page 404.)arrow_forwardThe Fed is very concerned about the stability of financial markets. When individuals and firms are concerned about how markets are operating, you will find that spending could slow down. Explain how the Fed can provide stability to markets and how does the Fed impact your daily decisions.arrow_forward
- what happens to interest rates and short run real GDP when the federal funds rate increases?arrow_forwardDistinguish between the Federal funds rate and the prime interest rate. Why is one higher than the other? Why do changes in the two rates closely track one another?arrow_forwardExplain how financial crises lead to a credit crunch and a recession.arrow_forward
- What is a mortgage? What were the important developments in the mortgage market during the years after 1970?arrow_forwardFMPMC 123 BANKING AND FINANCIAL INSTITUTIONS MODULE 3: THE BANKING LAWS AND REGULATIONS LEARNING ASSESSMENT M3B PROBLEMS 1. For each of the following economic changes, predict what will happen to equilibrium interest rate and quantity of money in the financial market. Sketch a demand and supply diagram to support your answers. (Letter A is solved/ answered as a sample of how you are to present the answers for the remaining letters.) A. Gross domestic product (GDP) in the economy increases. MS, i, MD, MD, Quantity of money Qu Since GDP increase will cause an increase in money demand, this causes the equilibrium interest rate in the money market to rise. The equilibrium quantity of money is constant at Qu since MS is fixed. (Now do the rest of the problems.) B. The BSP changes its bank regulations in a way that makes it cheaper and easier for banks to make loans. C. People gain confidence that the economy is growing and that their jobs are secure. D. Banks that have made loans find that…arrow_forwardTargeting 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_forward
- If government spending were increased, what would occur to interest ratesarrow_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_forwardExplain how each of the following helps to stabilize the financial system: deposit insurance, capital requirementsarrow_forward
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