Macroeconomics
13th Edition
ISBN: 9781337617390
Author: Roger A. Arnold
Publisher: Cengage Learning
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Chapter D, Problem 2QP
To determine
The relation between the
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If 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.
help please answer in text form with proper workings and explanation for each and every part and steps with concept and introduction no AI no copy paste remember answer must be in proper format with all working
1. Explain what happens to the money supply, interest rates, investment spending and GDP when the Fed makes open market bond purchases.
2. Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve’s open market purchase of Treasury securities.
Chapter D Solutions
Macroeconomics
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- Graphically explain (using both bond market and money market graphs) what is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public. If the federal government were to reduce the income tax rates, would this have any impact on a state's cost of borrowing funds? Draw graphs and explain.arrow_forwardPlease explain the relationship between bond market and money market. Explain the process how an increase in the money supply by the Fed lowers the interest rate through the BOND MARKET to reach the new equilbrium interest rate. Explain the impact of increase in GDP on the interest rate.arrow_forwardOutline the ways in which FED easing affects the yield curve (include the theories of the yield curve as part of this). Is it possible for an increase in the real money supply (FED easing) to have exactly the opposite effect? Explain the basis for why this is or is not possible.arrow_forward
- Suppose that a bank does the following: a. Sets a loan rate on a prospective loan with BR = 8.04% and ϕ = 4.15%. b. Charges a 0.26 percent loan origination fee to the borrower. c. Imposes a 14 percent compensating balance requirement to be held as noninterest-bearing demand deposits. d. Holds reserve requirements of 9 percent imposed by the Federal Reserve on the bank’s demand deposits. Calculate the bank’s ROA on this loan. Note: Convert your answer to percentage format. Enter your answer rounded to 2 decimals, and without any units. So, for example, if your answer is 3.4568%, then just enter 3.46.arrow_forwardUse a diagram to illustrate the market for reserves and show how open market purchases of securities by the Fed can decrease the federal funds rate from an initial equilibrium that is above the interest rate paid on reserves to a rate that is equal to the interest rate paid on reserves.arrow_forwardAssume that banks are able to lend out 85 cents on every dollar deposited, and a bank receives $9,000 in deposits. If the reserve requirement is altered to 10%, what will this do to the money supply? What does this do to equilibrium interest rate in the market for loanable funds? (Show on a graph.) What is another way the Federal Reserve will achieve the same outcome in Part 1?arrow_forward
- Suppose the Central Bank of Kenya pursues an aggressive Restrictive policy by increasing the reserve requirements to 25% in an attempt to control inflation. What is the effect of such a policy on the Credit Multiplier and Money Supply? Justify your answer.arrow_forwardIf the Fed wants to increase the money supply it will buy bonds. True Falsearrow_forwardWhich of the following refers to the federal funds rate (FFR) (choose one)? A. Interest rate on a bank's reserve deposits at the Fed B. Rate on Treasury bills purchased by a bank C. Interest rate on a non-bank financial institution's reserve deposits at the Fed D. Interest rate on loans a bank makes to other financial institutionsarrow_forward
- Explain how a Reserve Bank policy can affect the bond supply equation.arrow_forwardMatch each definition of money demand in the following table with its key term. Definition The stock of money people hold to pay unpredictable expenses The stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or other nonmoney financial assets The stock of money people hold to pay everyday, predictable expenses The demand for money curve graphs the quantity of money on the overall demand for money curve, you must take into account table. Term axis and the interest rate on the axis. To find the of the specific money demands you just identified in the previous True or False: The downward-sloping portion of the money demand curve is driven by the speculative demand for money. True Falsearrow_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_forward
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