Foundations of Economics (8th Edition)
8th Edition
ISBN: 9780134486819
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
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Chapter 33, Problem 10SPPA
To determine
To explain:
The problems that could arise if the interest rates are raised by Fed very early or very late.
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According to an article in the Wall Street Journal in June 2016, Congressman Jeb Hensarling of Texas, chair of the House Financial Services Committee criticized the Fed for paying banks an interest rate on their reserves that was higher than the federal funds rate.
Source: Kate Davidson,
open double quote“House
Republicans Grill Janet Yellen on Fed
Operations,close double quote”
Wall Street
Journal,
June 22, 2016.
Why isn't the Fed able to set the interest rate it pays banks on reserves equal to the actual federal funds rate?
A.
Only banks can borrow and lend in the federal funds market.
B.
Financial institutions such as Fannie Mae can borrow and lend in the federal funds market, but are not eligible to receive interest on their deposits with the Fed.
C.
There is not enough competition among banks to drive the federal funds rate up to the interest rate the Fed pays on reserves.
D.
Competition among banks to obtain funds on the federal funds market drives the interest…
4.
July 2020, an article on reuters.com noted that: "The Fed's total balance
sheet size rose.... It was largely due to continued purchase of Treasuries and mortgage-
backed securities aimed at keeping financial market conditions easy."
(a)
Why would the Fed's buying Treasury securities and mortgage-backed
securities cause the Fed's balance sheet to rise?
6.Fed is split over time of rate rise
In October 2009, the Fed was forecasting that
unemployment will average 9.8 percent in 2010 and said
the federal funds rate will remain "exceptionally low" for
"an extended period." But some officials were beginning
to worry about unwinding the $2 trillion in special credits
that have boosted the monetary base and to wonder if
the interest rate might need to start rising soon.
Source:
The
New York Times,
October
9, 2009
Describe the time lags in the operation of monetary
policy and explain why they pose a challenge for the Fed
in deciding when to start raising the federal funds rate
target in a recession.
The time lag between the implementation of monetary
policy and the resulting change in the inflation rate is
approximately
This poses a challenge for the Fed in deciding when to
start raising the federal funds rate target in a recession
because.
А.
1
year;
if the Fed raises the federal funds rate too soon, it
could lengthen the recession
В.
a few…
Chapter 33 Solutions
Foundations of Economics (8th Edition)
Ch. 33 - Prob. 1SPPACh. 33 - Prob. 2SPPACh. 33 - Prob. 3SPPACh. 33 - Prob. 4SPPACh. 33 - Prob. 5SPPACh. 33 - Prob. 6SPPACh. 33 - Prob. 7SPPACh. 33 - Prob. 8SPPACh. 33 - Prob. 9SPPACh. 33 - Prob. 10SPPA
Ch. 33 - Prob. 11SPPACh. 33 - Prob. 1IAPACh. 33 - Prob. 2IAPACh. 33 - Prob. 3IAPACh. 33 - Prob. 4IAPACh. 33 - Prob. 5IAPACh. 33 - Prob. 6IAPACh. 33 - Prob. 7IAPACh. 33 - Prob. 8IAPACh. 33 - Prob. 9IAPACh. 33 - Prob. 10IAPACh. 33 - Prob. 11IAPACh. 33 - Prob. 12IAPACh. 33 - Prob. 1MCQCh. 33 - Prob. 2MCQCh. 33 - Prob. 3MCQCh. 33 - Prob. 4MCQCh. 33 - Prob. 5MCQCh. 33 - Prob. 6MCQCh. 33 - Prob. 7MCQ
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- 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_forward"Fed Chair Jerome Powell said he supports a traditional quarter-point increase in the Federal Reserve's benchmark short-term interest rate when the Fed meets later this month, rather than a larger increase that some of its policymakers have proposed." - ABC News, March 2, 2022 If the Federal Reserve increases the Federal Funds Rate this month, then which of the following is likely to happen in the US economy? Money supply will decrease and aggregate demand will decrease Money supply will increase and aggregate demand will increase Money supply will decrease and aggregate demand will increase Money supply will increase and aggregate demand will decreasearrow_forwardWhat was the actual federal funds rate set by the Fed in 2021? Was monetary policy expansionary or contractionary? Briefly explain.arrow_forward
- 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_forwardThe above figure has the demand for money curve. Suppose the Fed initially sets the quantity of money equal to $0.6 trillion. Draw the supply of money curve in the figure. What is the equilibrium interest rate? Now suppose the Fed increases the quantity of money to $0.9 trillion. Draw the new supply curve. What is the new equilibrium interest rate? If the Fed sells $100 million of U.S. government securities, what happens to the quantity of money?arrow_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_forward
- The 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_forwardAccording to John Maynard Keynes, Answer the demand for money in a country is determined entirely by that nation’s central bank. the supply of money in a country is determined by the overall wealth of the citizens of that country. the interest rate adjusts to balance the supply of, and demand for, money. the interest rate adjusts to balance the supply of, and demand for, goods and services. Question 34 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: Answer “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…arrow_forwardIf the Fed has announced that it plans on increasing the interest rate it willarrow_forward
- In the Financial Times article, “Fed signals no rate rise until at least 2024 despite growth upgrade” (17 March 2021), we can read: “Federal Reserve officials signalled that they expect to keep interest rates close to zero until at least 2024, even as they sharply upgraded their US growth forecasts because of a massive fiscal stimulus and an accelerating vaccine rollout. [...] The upgrades to the forecasts from Fed officials were significant: whereas in December they predicted 4.2 percent growth this year, that estimate was bumped up to 6.5 percent, which would be the fastest economic expansion since 1984. Meanwhile, the unemployment rate is now forecast to fall to 4.5 percent by the end of the year instead of 5 percent. [...] inflation [...], is expected to rise to 2.2 percent and above the central bank’s 2 percent target, compared with the smaller rise to 1.8 percent predicted in December. [...] The Fed has pledged to maintain rock-bottom interest rates until the US reaches full…arrow_forwardWhat 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_forwardTable 15-4 Year 2022 2023 Potential Real GDP $18.1 trillion 18.4 trillion Real GDP $18.1 trillion 18.3 trillion Price Level Use the editor to format your answer 150 153 Refer to Table 15-4. Suppose the following table illustrates the values of real and potential GDP and the price level if the Fed does not vote to change their current policy to be more contractionary or expansionary. If the Fed wants to keep real GDP at its potential level in 2023, should the Fed use a contractionary or expansionary policy? How should it conduct open market operations to achieve its goal?arrow_forward
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