Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 29, Problem 3TY
To determine
The effects of the purchase of government bonds on the balance sheets of the Fed, the Bank of America, and Gates.
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While 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.”
1. If one still argues that the monetary
policies conducted by the Federal Reserve
is heavily influenced by the Congress and
the White House, what could be the
evidence we can find in the system which
supports the argument? (briefly explain in
a paragraph or so)
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.”
Chapter 29 Solutions
Economics: Principles & Policy
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- Part 1: Which of the following Fed actions will increase bank lending? Select one or more answers from the choices shown. The Fed raises the discount rate from 5 percent to 6 percent. The Fed raises the reserve ratio from 10 percent to 11 percent. The Fed buys $400 million worth of Treasury bonds from commercial banks. The Fed lowers the discount rate from 4 percent to 2 percent. (Helpful info)Note that Fed sets a discount rate that it charges to banks for short-term loans, which then contributes to the rate that the banks charge customers on their loans. While the Fed has the ability to issue Federal Reserve Notes, the paper currency used in the U.S. monetary system, they do not print the money. That task is still performed by the U.S. Mint. After the financial crisis of 2007-2008, Congress increased the Fed’s supervisory powers. Part 2: Describe tools that the US Treasury and the Federal Reserve use to undertake restrictive monetary policy today (versus before the…arrow_forwardThe Federal Reserve wants to increase the money supply by increasing the lending potential of commercial banks by $260 billion. It plans to use open-market operations to accomplish this goal. The current reserve requirement for commercial banks is 10 percent. Instructions: Enter your answer as a whole number. a. Will the Fed want to buy or sell government securities if sales or purchases of government securities are the only instrument used in the open-market operations? The Fed will want to (Click to select) va total $. billion in government securities. ....... b. What other option could the Fed pursue-rather than permanently transferring the ownership of securities-to achieve its goal? The Fed could use some amount of (Click to select) v to effectively (Click to select) v commercial banksarrow_forwardArticle Summary In a September 2013 speech to the Independent Bankers Association of Texas, Federal Reserve Bank of Dallas president Richard Fisher stated that the Fed's credibility was harmed when it announced the previous week that it would continue its large bond purchasing program. In June, Fed Chairman Ben Bernanke had stated that that the program could begin to be cut back later in the year, and several other Fed officials expressed being open to the announced timing of this policy. Bernanke's change in his announced timeline of the Fed's intentions regarding the bond purchasing program brought criticism that the Fed had misled investors. In his speech, Fisher stated "I disagreed with the decision of the committee and argued against it. Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question. I believe that is exactly what has occurred, though I take no…arrow_forward
- Suppose that the reserve requirement for checking deposits is 16 percent and that banks do not hold any excess reserves. If the Fed sells $2 million of government bonds, the economy's reserves (either increase or decrease) by $______million, and the money supply will (increase or decrease) by $______million. Now suppose the Fed lowers the reserve requirement to 8 percent, but banks choose to hold another 8 percent of deposits as excess reserves. True or False: The money multiplier will increase. False True or False: As a result, the overall change in the money supply will increase. Truearrow_forwardIf the Fed wants to increase the money supply by $100 million does it have to buy more than $100 million of bonds, less than $100 million of bonds or exactly $100 million of bonds? Explain.arrow_forwardFed 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_forward
- Helicopter Money Primer: The possible next frontier in quantitative easing Central banks—the Fed, the Bank of Japan, the European Central bank, the People's Bank of China, and others—have bought trillions of dollars of bonds. The Fed alone has bought $4 trillion-worth. Source: Daily FX, July 15, 2016 What are the Fed's policy tools and which policy tool did the Fed use to increase its assets to $4 trillion? The Fed's policy tools include ______. A. the required reserve ratio, discount rate, and government expenditure B. extraordinary crisis measures, marginal tax rates, and the discount rate C. the required reserve ratio, discount rate, and open market operations D. open market operations, marginal tax rates, and government expenditure To increase its assets to $4 trillion, the Fed used _______. A. a printing press to print more currency B. required reserve ratios C. the discount rate…arrow_forwardQuestion 1 Which of the following Fed actions will increase bank lending? Select one or more answers from the choices shown. The Fed raises the discount rate from 5 percent to 6 percent. The Fed raises the reserve ratio from 10 percent to 11 percent. The Fed buys $400 million worth of Treasury bonds from commercial banks. The Fed lowers the discount rate from 4 percent to 2 percent. Note that Fed sets a discount rate that it charges to banks for short-term loans, which then contributes to the rate that the banks charge customers on their loans. While the Fed has the ability to issue Federal Reserve Notes, the paper currency used in the U.S. monetary system, they do not print the money. That task is still performed by the U.S. Mint. After the financial crisis of 2007-2008, Congress increased the Fed’s supervisory powers. Question 2 Describe tools that the US Treasury and the Federal Reserve use to undertake restrictive monetary policy today (versus before the mortgage-debt…arrow_forwardThe Federal Reserve wants to increase the money supply by increasing the lending potential of commercial banks by $320 billion. It plans to use open-market operations to accomplish this goal. The current reserve requirement for commercial banks is 5 percent. Instructions: Enter your answer as a whole number. a. Will the Fed want to buy or sell government securities if sales or purchases of government securities are the only instrument used in the open-market operations? The Fed will want t (Clicca total of $1 billion in government securities. ue-rather than permanently transferring the ownership of securities to achieve its goal? commercial banks. buy b. What other option cell The Fed could use some amount of (Click to select) to effectively (Click to select)arrow_forward
- What two monetary policy tools does the Fed now rely on in changing its target for the federal funds rate? Briefly describe how the Fed can use these tools to raise its target for the federal fund rate. (Choose two from the list below) 1. Increasing the interest rate it pays on banks' reserves 2. Rasing the interest rate it pays on overnight reverse repurchase facilities 3. Using a policy of quantative easing to sell long term securities 4. Decreasing the interest rate it pays on banks' reserves 5. Lowering the interest rate it pays on overnight reverse repurchase facilitiesarrow_forward(Problem 3, Page 439) Suppose that the Fed has a policy of increasing the money supply when it observes that the economy is in recession. However, suppose that about six months are needed for an increase in the money supply to affect aggregate demand, which is about the same amount of time needed for firms to review and reset their prices. What effects will the Fed's policy have on output and price stability? Does your answer change if (a) the Fed has some ability to forecast recessions or (b) price adjustment takes longer than six months?arrow_forwardBriefly describe what will happen to the Federal Reserve Bank's balance sheet after each of the following cases. (Clearly specify (A) which part(s) of the balance sheet (assets or liabilities) will be affected, and (B) it will increase or decrease that part(s) of the balance sheet.) 1. The Federal Reserve conducts an open market purchase of $100 million of U.S. Treasury securities. 2. A commercial bank borrows $100 million from the Federal Reserve. 3. The amount of cash in the vaults of commercial banks falls by $100 million due to withdrawals by the public.arrow_forward
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