2.3: In an economic environment where the initial policy interest rate (ip) and the equilibrium interest te (ie) are equal in the reserve market, the central bank plans to lower the required reserve ratios in rder to recover from the economic recession. If this monetary policy measure is implemented, a. How a divergence occurs between the policy interest rate and the equilibrium interest rate? b. What kind of measure should the central bank take to keep the equilibrium and the policy nterest rates equal? Explain by drawing the related figure(s).

2.3: In an economic environment where the initial policy interest rate (ip) and the equilibrium interest te (ie) are equal in the reserve market, the central bank plans to lower the required reserve ratios in rder to recover from the economic recession. If this monetary policy measure is implemented, a. How a divergence occurs between the policy interest rate and the equilibrium interest rate? b. What kind of measure should the central bank take to keep the equilibrium and the policy nterest rates equal? Explain by drawing the related figure(s).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Suppose the Fed decides to purchase $60 billion worth of government securities on the open market. a. If the reserve ratio is 20 percent, what is the maximum potential change in the money supply? b. Why might the money supply not grow by this much? c. What will the purchase be by the Fed do to intrest rates? Why?
10. A central bank responds to inflation rising from 2 percent to 3 percent byincreasing the policy interest rate from 1 percent to 2.5 percent. Does this actionconform to the Taylor principle? Explain your answer.
Since the end of the Great Recession of 2008, interest rates have been at historic lows—in some cases, close to zero. How is expansionary monetary policy, or more specifically a open market purchase, supposed to work and How do near-zero interest rates limit the ability of expansionary monetary policy to work? how effective has the Fed’s policy been as a response to the Great Recession of 2008 and more recently the Covid 19 Recession? short answer ( paragraph ) supported by evidence
a)Explain why inside money might replace outside moneyb) Discuss why an increase in the reserve requirement might lower the rate ofreturn on deposits. How does your answer depend on whether there iscompetition between banks? c) Explain how changes in reserve requirements affect the real economy andconsumers’ consumption choice.
O O O O O O O O O O Which one of the following statements is FALSE? Select one: a. The prime bank rate is the rate banks charge their most credit-worthy commercial customers. b. The Fed can influence the supply of federal funds through open market operations. c. "Tight money" policies tend to increase the money supply growth rate. d. The Fed does not directly set the federal funds rate but instead tightly controls the rate through open market operations. e. The prime bank rate in the United States is consistently higher than the federal funds rate. In recessions, tax revenues tend to decline and transfer payments like unemployment insurance and food stamps tend to increase, so these programs... Select one: a. are procyclical. b. make Aggregate Expenditures less c. are automatic stabilizers. d. create budget surpluses during economic downturns. e. increase unemployment.
From any point below the current LM curve, money market equilibrium can be restored by some combination of a ________ income and a ________ interest rate that ________ the demand for money. Select one: a. lower, higher, increases b. higher, higher, increases c. lower, higher, reduces d. higher, lower, increases
FIGURE 1 MS P2 r2 P1 AD MD2 r1 MD1 REFER TO FIGURE 1. If the money-supply curve MS on the left-hand graph were to shift to the right, this would O create, until the interest rate adjusted, an excess demand for money at the interest rate that equilibrated the money market before the shift. All of the other answers are correct. O represent an action taken by the Federal Reserve. O shift the AD curve to the left.
Figure 31-5: Monetary Policy I Aggregate price level, P P₂ P₁ E₁ LRAS E₂ SRAS AD₂ AD₁ Y₁ YE potential Real GDP output Use the "Monetary Policy I" Figure 31-5. If the money market is initially at E2 and the central bank chooses to buy bonds, then: AD2 will shift to the right, creating an inflationary gap. AD2 may shift to AD₁, creating a recessionary gap. AD₁ may shift to AD2, closing an existing recessionary gap. AD₁ will shift to the left, increasing an existing recessionary gap. AD2 will shift to the right, creating a recessionary gap.
3. A. Suppose a collapse in consumer spending lowers GDP below potential and causes deflation in the economy. With the monetary policy rule that follows the Taylor Principle (the typical one we assume in lecture) should the central bank increase GDP above potential GDP? Why? B. In order to increase GDP what must the central bank do to interest rates? Is it always possible to raise GDP by changing the nominal interest rate? Why or why not?
Figure: Monetary Policy I Aggregate price level, P P₂ P₁ LRAS SRAS * AD₂ AD₁ Y₁ YE-potential Real GDP output Refer to Figure: Monetary Policy I. If the economy is initially in equilibrium at E2 and the central bank chooses to sell Treasury bills_ shift to a(n) gap. AD₂ will; AD₁, causing; recessionary AD₁ will; AD2, closing; recessionary AD₁ will; the left, increasing; recessionary AD2 will; the right, causing; inflationary 0
By increasing the required reserve ratio, the Fed forces banks to hold a _______ quantity of monetary base and the interest rate _______. A. smaller; falls B. larger; rises C. larger; falls D. smaller; rises