14. What are the implications of a liquidity trap for the Federal Reserve? A liquidity trap is a situation in a severe (expansion, recession ) in which the central bank's injection of additional reserves into the banking system has ( little or no, too much excessive ) additional positive impact on lending, borrowing, investment, or aggregate demand. The implication is that the Fed can create excess reserves, (and it can, but it cannot ) guarantee that banks will want to make additional loans. Households and businesses may not want to borrow, and the money received from the Fed's purchase of securities may be used to pay off existing loans rather than to increase their purchases of goods and services.

14. What are the implications of a liquidity trap for the Federal Reserve? A liquidity trap is a situation in a severe (expansion, recession ) in which the central bank's injection of additional reserves into the banking system has ( little or no, too much excessive ) additional positive impact on lending, borrowing, investment, or aggregate demand. The implication is that the Fed can create excess reserves, (and it can, but it cannot ) guarantee that banks will want to make additional loans. Households and businesses may not want to borrow, and the money received from the Fed's purchase of securities may be used to pay off existing loans rather than to increase their purchases of goods and services.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Monetary System

Section: Chapter Questions

Problem 9PA

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8. The reserve requirement, open market operations, and the moneysupply Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $100. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table. Reserve Requirement (Percent) 15 10 Simple Money Multiplier A lower reserve requirement is associated with a Money Supply ollars) money supply. Suppose the Federal Reserve wants to increase the money supply by $100. Maintain the assumption that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth $ of U.S. government…
19. Suppose that the money supply is $100, the velocity of money is 4, and real GDP is 200. (a) What is nominal GDP? (b) What is the price level (the GDP deflator)? (c) Assuming that the velocity of money is constant, what will nominal GDP equal if the Fed acts to increase the money supply to $200? (d) Assuming that the velocity of money is constant and that "money is neutral in the long run," what will real GDP equal in the long run if the Fed acts to increase the money supply to $200? (e) Still assuming that the velocity of money is constant and that money is neutral in the long run, what will the price level equal in the long run if the Fed acts to increase the money supply to $200?
1. Which do you think would be more harmful to the economy—an inflation rate that averages 5 percent a year that has a high standard deviation or an inflation rate of 7 percent that has a standard deviation close to zero? 2. Suppose a major bank needs to borrow $20 billion overnight that it cannot obtain from private creditors. The Fed is willing to make a discount loan of $20 billion provided that it will not alter the aggregate supply of reserves to the banking system. How can it do so?
16. An open-market sale of government bonds by the Fed results---------in reserves and ---------in the supply of money. a) an increase; a decrease (b) a decrease; a decrease (c) an increase; an increase (d) a decrease; an increase
Suppose that this year's money supply is $2 trillion, nominal GDP is $10 trillion, and real GDP is $8 trillion (a) What is the price level? What is the velocity of money? (b) Suppose that velocity is constant, and the economy's output of goods and services rises by 15 percent each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant? (c) What money supply should the Fed set next year if it wants to keep the price level stable, given that velocity is constant, and the economy's output of goods and services has risen by 15%? (d) What monoy supply should the Fed set next year if it wants inflation of 5 percent, with velocity otill constant and the economy's output of goods and services risen by 15%?
2 Suppose real GDP is forecasted to grow by 2.18%, the velocity of money has stable, and the Fed announces an target of 2.90%. What is money growth rate the Fed could implement and still its infation target?
)The central bank of your assigned Caribbean country decides to pursue anexpansionary monetary policy.(i) Identify one possible action they could take. (ii) Carefully explain, in as much detail as possible, how the chosen action will impact the money market. (iii) Illustrate the overall impact of the chosen action on the money market.(iv) Identify a newspaper article in your assigned Caribbean country thatprovides a situation in which an expansionary monetary policy wasimplemented by the central bank. Ensure that you provide a screenshot of the article in your submission.
51) What is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public? 52) Use demand and supply analysis to explain why an expectation of Fed rate hikes would cause Treasury prices to fall. 5.4 Supply and Demand in the Market for Money: The Liquidity Preference Framework 1) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth intwo forms: A) real assets and financial assets. B) stocks and bonds. C) money and bonds. D) money and gold. 2) In Keynes's liquidity preference framework, A) the demand for bonds must equal the supply of money. B) the demand for money must equal the supply of bonds. C) an excess demand of bonds implies an excess demand for money. D) an excess supply of bonds implies an excess demand for money. 3) In Keynes's liquidity preference framework, if there is excess demand for money, there is…
5 You are an FOMC member, and you know that, in the last few recessions, the Fed cut interest rates by around 500 basis points. As the pandemic loomed in early 2020, the bottom of the Fed Funds target range was at 1.5 percent (the Fed only had around 150bp room to cut), while PCE inflation (your favourite inflation measure) was near the 2 percent target. What other options were available to the Fed? How do they work?
1. a)True or false and explain: If bank's expectations cause them to reduce lending there will be an unanticipated increase in the money supply. b) Suppose banks have a 20% reserve requirement and hold no excess reserves. Banks have $4500 in reserves and the non-bank private sector holds $1500 in currency. What is the total money supply? What happens to the total money supply if the non-bank private sector deposits $500 of their currency into the banking system? c)Suppose there was only one firm that manufactured wooden barber poles (the red and white striped pole outside barber shops). Would this firm have pure monopoly power? Explain!
3. Suppose the Fed buys $200 million in U.S. Treasury bills. a. Is this policy expansionary or contractionary? (3) 0. Show the changes to the T-accounts for commercial banks (i.e, all commercial banks together). (3) c. If the public holds a fixed amount of currency (so that all loans create an ec of deposits in the banking system), the minimum reserve ratio is 10%, and banks ho h uäll the money supply change?