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Samantha Robinson ID:75-260-8915 The article I read is about an interview with Janet Yellen on where our economy is currently headed. She previously served as the chair of the Federal Reserve and is currently the Treasury Secretary. Based on her knowledge of money supply and monetary policy, she believes that inflation rates will continue to fall. As of right now, inflation is still causing an increase in prices, but it is doing so at a slower rate. She says that this soft landing will only be achieved if the US labor market stays strong when inflation rates drop. Therefore, she believes the current administration should take action to secure the job market by bringing it to full capacity. The Fed has a goal of 2%, and as of November, the current average rate is 3.1%. Yellen says, in this article, that while Americans wait for the continued decline, it shouldn’t negatively affect us. She also refutes previous economist theories that we will soon enter a recession. Yellen also notes that it is likely that interest rates will rise if inflation falls. This article seems to be a perfect representation of the monetary policy that was discussed in the homework. Essentially, it describes actual examples of how different policies inversely affect the supply of money in the economy. For example, the Federal Reserve has two equally important goals as far as boosting the market; it needs to lower inflation rates to 2% while maintaining a healthy job market. In addition, the article makes a clear stance on the inverse relationship between interest rates and inflation. Interest rates have generally been adjusted already as a response to inflation, so if inflation drops, the interest rates will no longer need to make up for the additional expense caused by it. If interest rates are higher, however, according to the homework, this would have a negative effect on our economy. Banks would be unable to offer as many loans, because some consumers will be scared off by higher interest rates, so no new money would be created. Consumers are also more likely to save their money if higher interest rates mean they could make more money this way. This will lead to decreased spending and lower the aggregate demand across the country. It is unclear if the Fed should take preemptive action and cut interest rates, although increased tax revenue has been suggested. This policy would counteract the effect of higher interest rates that directly increase the government’s spending budget.

ECONOMY CENTRAL BANKING Yellen Says U.S. Economy on Path to So � Landing Treasury secretary says in � lation is ‘meaningfully coming down’ By Andrew Duehren Follow Dec. 12, 2023 11:34 am ET WASHINGTON—Treasury Secretary Janet Yellen said the U.S. economy is on the path toward taming in fl ation without a deep economic slowdown, achieving a so-called soft landing. “To me a soft landing is the economy continues to grow, the labor market remains strong and in fl ation comes down. And I believe that’s the path we’re on,” Yellen said Tuesday at The Wall Street Journal’s CEO Council Summit. Yellen spoke soon after monthly Labor Department data showed in fl ation holding nearly steady, with the consumer-price index rising 3.1% in November from a year earlier. That is a slight slowdown from the 3.2% reading in October. Economists for months have debated whether a soft landing for the U.S. economy was possible. Earlier in the year, the consensus among economists surveyed by the Journal was that the economy would enter a recession, though those expectations faded over time. Yellen, a former academic economist and chair of the Federal Reserve, said that the data show that in fl ation is falling toward the Fed’s 2% target and that it doesn’t appear that the fi nal stretch toward that marker will be painful for Americans. “It’s certainly meaningfully coming down. And I see no reason, on the path that we’re currently on, why in fl ation shouldn’t gradually decline to levels that are consistent with the Fed’s mandate and targets,” she said. “I personally don’t see any good reason to think that the last mile is going to be especially di ffi cult.” She said Americans don’t expect in fl ation to persist, helping the U.S. economy to smoothly slow price increases. In previous in fl ation episodes, Americans expected higher prices, forcing the Fed to hold interest rates high enough to Yellen Says U.S. Economy on Path to Soft Landing - WSJ https://www.wsj.com/economy/central-banking/yellen-says-u-s-econo... 2 of 3 12/12/2023, 11:54 AM

Graded Assignment 12 Name: ID: 1. Explain how an increase in government spending and an equal increase in income taxes affect aggre- gate demand. Be specific and precise. 2. How would the effectiveness ofa countercyclical tax increase or decrease if individual consumption deci- sions are based on lifetime or permanent income rather than current income? (Hint: What effect, if any, will a temporary change in taxes have on permanent or lifetime income?) Be precise. Given your answer to this question, discuss the likely effects of a one-time tax rebate of, say, $ 1000 given to every household. (Hint: Would the likely effects be larger or smaller than those predicted by the sim- ple multipliers derived in the text?) Be precise—if larger, why? If smaller, why? If zero, why? 3. How would you explain to someone who had not taken Econ 110 why an increase in government expenditures of, say, $20 billion will not have the same effect as a tax cut of an equal amount? 629 Workbook pages may not be reproduced in any form without the written permission of the publisher.

630 Econornics and Public Policy: An Analytical Approach 4. Explain in a way that someone who had not taken Econ 110 would understand, what a "supply-side" policy is. Under what specific conditions would a supply-side policy implemented as a tax cut not increase the government's deficit if the government did not, at the same time, cut its expenditures? (Hint: The government's revenue is the tax rate X tax base. For purposes of this question, assume that there is a single tax rate, r, that is cut and that the tax base is real output, y.) Under what specific conditions should a policy maker worry about supply-side effects when evaluat- ing policies designed to affect aggregate demand? Be precise. 5. Indicate the appropriate countercyclical fiscal policy to offset the following changes in the aggregate economy. (Indicate whether taxes or government spending should be increased or decreased.) Assume that for each situation, the economy begins at full employment equilibrium. Taxes a) Increase in aggregate demand b) Decrease in investment c) Consumer confidence drops d) Recession e) Adverse supply shock f) Inflation Government spending Workbook pages may not be reproduced in any form without the written permission of the publisher.

632 Economics and Public Policy: An Analytical Approach e. Why don't they hold all of their wealth as money? f. How, specifically, does the interest rate determine the division between the amount of wealth as money and the amount of wealth held in other kinds of assets? 9. Indicate whether the monetary policy instrument should be increased or decreased (for OMO (open market operation), indicate whether bonds should be bought or sold). Discount rate a) Increase in aggregate demand Explain precisely why this is the appropriate policy response. b) Decrease in investment spending Explain precisely why this is the appropriate policy response. c) Consumer confidence in the economy drops Explain precisely why this is the appropriate policy response. d) Recession Explain precisely why this is the appropriate policy response. e) Adverse supply shock Explain precisely why this is the appropriate policy response. f) Inflation Explain precisely why this is the appropriate policy response. OMO Workbook pages may not be reproduced in any form without the written permission of the publisher.

Graded Assignment 12 < 633 10. For the following questions, assume that the reserve requirement is 10%, there are no leakages, and the bank begins with $20 million in total demand deposits. For parts a through g, your answers must include your calculations. a. How much money must the bank have in reserves to meet the reserve requirement? b. If a deposit of $2500 is made to the bank, how much of that deposit can the bank loan out to a customer? c. What is the potential money multiplier if all banks "look like" this bank? d. If the Fed's Open Market Committee sells $60 million in bonds, what will be the resulting change in the money supply? e. If the reserve requirement is decreased to 5%, how much money must each bank have in reserves to meet the new, lower requirement? f. What is the new potential money multiplier if the reserve requirement becomes 5% and all banks "look like" this bank? g. With a reserve requirement of 5%, how many bonds (dollar value) must the Fed's Open Market Committee sell to have the same effect as the sale of $60 million in bonds in part (d)? h. Explain in a way that would be understood by someone who had not taken Econ 110, the effect of a decrease in the reserve requirement on the money supply. i. Would a substantial increase in the discount rate give banks the incentive to keep more reserves or less reserves on hand? Explain. j. Explain in a way that would be understood by someone who had not taken Econ 110, the effect an increase in the discount rate would have on the money supply. 11. Suppose that banks have loaned out all reserves in excess of what they are legally required to hold and the required reserve ratio is .1. The Fed makes an open market purchase of $100,000 and each bank, at the same time, decides to hold excess reserves equal to 5% of its deposits. Your answers to parts a, b, and d must include your calculations. a. What will be the actual money multiplier in this case? b. What will be the potential money multiplier? Workbook pages may not be reproduced in any form without the written permission of the publisher.

Graded Assignment 12 < 635 Why is it important to have some kind of measure of money? (Hint: What does the Fed need to know to conduct monetary policy?) 13. Fill in the blanks for each of the following statements regarding macroeconomic relationships. Assume that all else is held equal for each statement. a. As the capital per worker increases, labor productivity (increases/decreases/stays the same) b. As the money supply increases, the price level (increases/decreases/stays the same) c. As technology improves, labor productivity (increases/decreases/stays the same) d. With sticky wages, as the price level increases, the real wage (increases/decreases/stays the same) e. As the real wage decreases, the demand for labor (increases/decreases/stays the same) f. As the capital stock increases, long-term economic growth (increases/decreases/stays the same) g. As the interest rate increases, the cost of borrowing money (increases/decreases/stays the same) h. As the labor force increases, capital per worker (increases/decreases/stays the same) i. As the supply of labor increases, the real wage (increases/decreases/stays the same) 14. A firm has a project that will cost $1 million today and return $1.5 million in five years. Complete the following table: interest rate = .01 .02 .03 .04 .05 .06 .08 .09 .10 .12 .13 .15 present value of $1.5 million = Workbook pages may not be reproduced in any form without the written permission of the publisher.

636 Economics and Public Policy: An Analytical Approach When would it be profitable to undertake the project? Why? (Be precise.) What does this suggest about the relationship between the interest rate and investment? Be specific. 15. True, False, Uncertain (circle one; explain your answer): "If banks hold only a fraction of the amount deposited in checking accounts, then the money supply will be affected by whether individuals hold currency or deposit currency in their checking accounts." 16. True, False, Uncertain (circle one; explain your answer): "Ceteris paribus and in the short run, if the Fed wants to reduce interest rates, it has to increase the money supply." 17. Find an application or example (good or bad) of one of the ideas covered in Chapters 21 or 22 from the Wall Street Journal, the Economist, or the New York Times. Write an at-least-one-page essay dis- cussing the economics of the article you selected. Attach the article or a copy and your essay to this assignment. Workbook pages may not be reproduced in any form without the written permission of the publisher.