Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 24, Problem 3CQQ
To determine
Role of interest rate targets in Fed policy.
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(c) Monetory policy authorities will respond to the change in price level that occurred in part (b). How might the central bank respond to the change you described in part (b)?
(d) Draw a correctly labeled graph of the money market.
a. Label the equilibrium interest rate.
b. Show on your graph the change in money supply that will occur due to the monetary policy described in part (c).
c. Show on your graph the change in interest rates that will occur due to the monetary policy described in part (c).
(e) At the same time, assume that policymakers at the Bank of England enforce an expansionary monetary policy.
Suppose that the Bank of Canada determines that the Canadian economy is currently overproducing. What can the Central Bank do to slow down economic activity?
a. The Central bank can pursue an expansionary monetary policy by increasing the money supply, causing a decrease in the interest rate. As a result, real GDP will increase and the price level will increase.
b. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing a decrease in the interest rate. As a result, real GDP will decrease and the price level will decrease
c. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing an increase in the interest rate. As a result, real GDP will decrease and the price level will decrease.
d. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing an increase in the interest rate. As a result, real GDP will decrease and the price level will increase
e. The…
The Fed’s target for the federal funds ratea. is an extra policy tool for the central bank, inaddition to and independent of the money supply.b. commits the Fed to set a particular money supplyso that it hits the announced target.c. is a goal that is rarely achieved because the Fedcan determine only the money supply.d. matters to banks that borrow and lend federalfunds but does not influence aggregate demand.
Chapter 24 Solutions
Essentials of Economics (MindTap Course List)
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- Monetary Policy - End of Chapter Problems Ther Fed creates a lower and upper bound for the federal funds rate and the incentives that drive financial institutions to move the federal funds market to that target. a. Select the tool(s) the Fed uses to incentivize financial institutions to move the federal funds market to the targeted federal funds rate. The Fed buys and sells government bonds. borrows money overnight from financial institutions. Incorrect b. Select the tool(s) the Fed uses to create a lower bound for the federal funds rate. The Fed borrows money overnight from financial institutions. lends directly to banks through the discount window. Incorrect pays banks interest on excess reserves. lends directly to banks through the discount window. The Fed c. Select the tool(s) the Fed uses to create an upper bound for the federal funds rate. pays banks interest on excess reserves. lends directly to banks through the discount window. pays banks interest on excess reserves. borrows…arrow_forward(a) The Federal Reserve Bank of the United States (i.e., the Fed) is responsible for financing the operations of the federal government. True or false? Explain. (b) Changes in reserve requirements are an effective monetary policy tool that the Fed uses frequently to control the money supply. True or false? Explain.arrow_forwardIf the Fed sells bonds, which of the following should increase? Select all that apply. The interest rate. The price level. OM1. The monetary base. Investment. GDP.arrow_forward
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- When the Fed buys government bonds, a- the money supply decreases and the federal funds rate increases. b- the money supply decreases and the federal funds rate decreases. c- the money supply increases and the federal funds rate decreases. d- the money supply increases and the federal funds rate increases.arrow_forwardWhen the Fed conducts an open market sale, it leads to a higher level of investment and output in the economy. True False Click to select your answer.arrow_forwardWhen 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_forward
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