Foundations of Economics (8th Edition)
8th Edition
ISBN: 9780134486819
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 28, Problem 5IAPA
To determine
To explain:
The effects of the Feds conducting an open market sale of securities in the short run on the nominal interest rate, and in the long run on the value of money and the price level.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
When the Fed targets the amount of money in the economy, interest rates
become more variable.
True
False
An individual deposits $2,000 in cash into her checking account. Calculate each of the following:
The immediate change in excess reserves.
The total increase in the money supply that will be generated from the transaction.
Using a correctly labeled graph of the money market, show the effect of the Federal Reserve selling bonds on the nominal interest rate.
3. Changes in the money supply
The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed,
but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market
is currently in equilibrium at an interest rate of 3.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star.
5.5
5.0
New MS Curve
Money Demand
4.5
4.0
New Equilibrium
3.5
3.0
2.5
2.0
Money Supply
1.5
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
MONEY (Trillions of dollars)
Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage point. To do this, the Fed will use open-
market operations to
the
money by
the public.
Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the
correct location. Place the black point…
Chapter 28 Solutions
Foundations of Economics (8th Edition)
Ch. 28 - Prob. 1SPPACh. 28 - Prob. 2SPPACh. 28 - Prob. 3SPPACh. 28 - Prob. 4SPPACh. 28 - Prob. 5SPPACh. 28 - Prob. 6SPPACh. 28 - Prob. 7SPPACh. 28 - Prob. 8SPPACh. 28 - Prob. 9SPPACh. 28 - Prob. 10SPPA
Ch. 28 - Prob. 11SPPACh. 28 - Prob. 1IAPACh. 28 - Prob. 2IAPACh. 28 - Prob. 3IAPACh. 28 - Prob. 4IAPACh. 28 - Prob. 5IAPACh. 28 - Prob. 6IAPACh. 28 - Prob. 7IAPACh. 28 - Prob. 8IAPACh. 28 - Prob. 9IAPACh. 28 - Prob. 10IAPACh. 28 - Prob. 11IAPACh. 28 - Prob. 12IAPACh. 28 - Prob. 1MCQCh. 28 - Prob. 2MCQCh. 28 - Prob. 3MCQCh. 28 - Prob. 4MCQCh. 28 - Prob. 5MCQCh. 28 - Prob. 6MCQCh. 28 - Prob. 7MCQCh. 28 - Prob. 8MCQ
Knowledge Booster
Similar questions
- The FED has recently decided to reverse the massive buildup of its holding of Treasury and mortgage bonds. Thus, they began to sell these Treasury securities in the financial markets to remove liquidity from them and reduce the supply of money and credit in the economy. This will create a shortage in the money market.arrow_forwardThe Fed increases the discount rate. As a result, ceteris paribus, the equilibrium interest rate will: a) not change b) decrease c) be ambiguous d) increasearrow_forwardWhen the Federal Reserve buys bonds, it effectively lowers the nominal interest rate in the market. true falsearrow_forward
- An increase in the interest rate will cause an increase in the demand for money. True Falsearrow_forwardThe Fed conducts open-market sales, which of the following three increases: interest rates, prices, investment soendingarrow_forwardThe demand for money is given by Md = $Y (0.3 - i), where $Y = 100 and the supply of money is $20. What is the equilibrium interest rate? What is the impact on the interest rate if central bank money is increased to $25?arrow_forward
- Explain how a sustained increase in the growth rate of the money supply (gM↑) at a particular time (t*) can lead first to the liquidity effect, then to the nominal income effect, and finally to the inflation expectations effect. Also, explain how the interest rate changes in response to each of these effects.arrow_forwardAn increase in the general price level means goods will now cost more. What effect with this have on money demand and the interest rate? inflation erodes the value of money, money demand falls as does the interest rate money demand rises, driving up interest rates money demand rises driving down interest rates money demand rises, forcing the central bank to increase the money supply, interest rates thus remain constant.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_forward
- If the money supply increases, and the price level is unchanged, interest rates will fall. True or falsearrow_forwardThe demand for money is given by Md = $Y (0.3-i), where $Y = 120 and the supply of money is $30. What is the equilibrium interest rate? If the central bank wants to decrease i by 2%, at what level should it set the supply of money?arrow_forwardWhat happens to the money supply when the Fed buys government bonds? According to the theory of liquidity preference, what is the impact of the Fed action on the equilibrium interest rate?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning