Macroeconomics
13th Edition
ISBN: 9780134735696
Author: PARKIN, Michael
Publisher: Pearson,
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Chapter 31, Problem 8SPA
(a)
To determine
Explain why the Fed decides to cut the federal funds rate in 2017.
(b)
To determine
Explain why the Fed decides to raise the federal funds rate in 2017.
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6.Fed is split over time of rate rise
In October 2009, the Fed was forecasting that
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because.
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Use the Front Page to answer three questions.
FRONT PAGE
Fed Raises Key Interest Rate
Washington D.C.-The Fed, as expected, raised the target rate on federal funds
from 2.25 to 2.5 percent today. Fed chair Jay Powell said the economy appeared
"healthy" and "solid" enough to accommodate a small increase in interest rates.
The Fed's goal is to keep inflation under control as the economy continues to
grow and unemployment falls to historic levels.
President Trump reacted immediately to the Fed action, calling it "foolish" and
"crazy" - an impediment to stronger growth and still more jobs.
Source: News reports of December 19-20, 2018.
Instructions: Round your response to two decimal places.
a. What was the Fed's target for the fed funds rate in late December 2018?
%
b. This was (Click to select) from the previous period.
c. This rate change would (Click to select) aggregate demand.
Federal Reserve Economic Data (FRED), from Federal Reserve Bank of Saint Louis provide the data in the chart below. In addition on Dec 14, 2016-
the Federal Funds Rate was 0.41 percent per year, and on Dec 28, 2016 it was 0.66 percent per year.
At the current level of the Federal Funds Rate, the Fed is.
concerned about inflation
6.0
7.0-
6.0
5.0
4.0
3.0-
2.0
1.0
0.0-
Federal funds rate (percent per year)
09/2006
09/2008
09/2010
Year
more; than it is about the exchange rate
less; than it is about unemployment
more; than it is about unemployment
less; than it is about government debt
09/2012
09/2014
09/2016
Chapter 31 Solutions
Macroeconomics
Ch. 31.1 - Prob. 1RQCh. 31.1 - Prob. 2RQCh. 31.1 - Prob. 3RQCh. 31.1 - Prob. 4RQCh. 31.2 - Prob. 1RQCh. 31.2 - Prob. 2RQCh. 31.2 - Prob. 3RQCh. 31.3 - Prob. 1RQCh. 31.3 - Prob. 2RQCh. 31.3 - Prob. 3RQ
Ch. 31.3 - Prob. 4RQCh. 31.4 - Prob. 1RQCh. 31.4 - Prob. 2RQCh. 31.4 - Prob. 3RQCh. 31.4 - Prob. 4RQCh. 31.4 - Prob. 5RQCh. 31 - Prob. 1SPACh. 31 - Prob. 2SPACh. 31 - Prob. 3SPACh. 31 - Prob. 4SPACh. 31 - Prob. 5SPACh. 31 - Prob. 6SPACh. 31 - Prob. 7SPACh. 31 - Prob. 8SPACh. 31 - Prob. 9SPACh. 31 - Prob. 10SPACh. 31 - Prob. 11SPACh. 31 - Prob. 12SPACh. 31 - Prob. 13SPACh. 31 - Prob. 14SPACh. 31 - Prob. 15SPACh. 31 - Prob. 16APACh. 31 - Prob. 17APACh. 31 - Prob. 18APACh. 31 - Prob. 19APACh. 31 - Prob. 20APACh. 31 - Prob. 21APACh. 31 - Prob. 22APACh. 31 - Prob. 23APACh. 31 - Prob. 24APACh. 31 - Prob. 25APACh. 31 - Prob. 26APACh. 31 - Prob. 27APACh. 31 - Prob. 28APACh. 31 - Prob. 29APACh. 31 - Prob. 30APACh. 31 - Prob. 31APACh. 31 - Prob. 32APACh. 31 - Prob. 33APACh. 31 - Prob. 34APACh. 31 - Prob. 35APACh. 31 - Prob. 36APACh. 31 - Prob. 37APACh. 31 - Prob. 38APACh. 31 - Prob. 39APACh. 31 - Prob. 40APACh. 31 - Prob. 41APA
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- Economics 8. The Taylor Rule and inflation Suppose the initial inflation rate and inflation target are both 2%, that the real federal funds rate is 2%, and that the economy is at the full employment level of output. According the Taylor Rule, the federal funds target should be Suppose now that the inflation rate changes to 4%. The Taylor Rule now prescribes that the federal funds target should be Next, suppose that economists predict that the economy would be at full employment at a level of $18.50 trillion. However, the actual GDP in the United States is $17 trillion. Assuming that the inflation rate is still 4%, the Taylor Rule prescribes that the federal funds target should be Based on the Taylor Rule, the Fed's target for the fed funds rate can never be negative. O True O Falsearrow_forwardBriefly describe how the Fed would use its three main policy tools to bring inflation down. (1) The Fed should increase or decrease the benchmark rates such as Fed funds rate? Briefly explain Why. (2) The Fed should buy or sell Treasury securities? Briefly explain Why. (3) The Fed should increase or decrease the bank reserve requirement ratio? Briefly explain Why.arrow_forwardExplain the Fed's policy tools and briefly describe how each works. The Fed uses its policy tools to _______. A. regulate the amount of money circulating in the United States by printing enough money each year for the purchase of consumer goods and services B. influence the exchange rate and the country's trade balance by adjusting the interest rate C. keep the government budget debt under $20 trillion by adjusting loans to Congress D. influence the interest rate and regulate the amount of money circulating in the United States by adjusting the reserves of the banking systemarrow_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 a. Increasing prices erode the purchasing power of the dollar. It is interesting to compute what goods would have cost at some point in the past after adjusting for inflation. Go to the Federal Reserve Bank of St. Louis, FRED database website at https://research.stlouisfed.org/fred2/and find the consumer price index for all urban consumers. What would a car that cost $25,000 today have cost the year 1996? b. Many countries have central banks that are responsible for their nation’s monetary policy. Go to www.bis.org/cbanks.htm and select one of the central banks (for example, ECB, Norway). Review that bank’s Web site to determine its policies regarding application of monetary policy. How does this bank’s policies compare to those of the U.S. central bank?arrow_forwardDraw a graph of the money market. Show the effect on the money demand curve, the money supply curve, and the equilibrium short-term nominal interest rate of each of the following: a. The Fed decreases the money supply. b. A recession causes real GDP to fall. c. The price level increases. d. The Fed increases the money supply at the same time that the price level falls.arrow_forward
- 24. Even with the power to change interest rates, the Fed is unable to directly impact inflation, output or unemployment. This is because: a. Interest rates do not affect inflation, output and unemployment Interest rates have no influence on the economy b. c. Interest rates determine the opportunity cost of spending money today Inflation, output and unemployment are fixed d. e. None of thesearrow_forward4. The hypothetical information in the following table shows what the values for real GDP and the price level will be in 2017 if the Fed does not use monetary policy. Year Potential GDP Real GDP Price level 2016 $17.7 trillion $17.7 trillion 114 2017 18.1 trillion 17.9 trillion 116 If the Fed wants to keep real GDP at its potential level in 2017, should it use an expansionary policy or a contractionary policy? Briefly explain your answer. b. Suppose the Fed's policy is successful in keeping real GDP at its potential level in 2017. State whether each of the following will be higher of lower than if the Fed had taken no action. а. I. Real GDP II. Potential GDP III. The inflation rate IV. The Unemployment rate c. Draw an AD and AS graph to illustrate your answer. Be sure your graph contains LRAS , SRAS, and AD curves for 2016 and 2017, with and without monetary policy action.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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