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 Quld lengtben the

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 Quld lengtben the

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Attempts 2. The theory of liquidity preference and the downward-sloping aggregate-demand curve The following graph shows the money market in a hypothetical economy. Assume that the central bank fixes the quantity of money supplied. Suppose the price level increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. ? INTEREST RATE (Percent) Average/4 18 15 1-3°C Cloudy Money Supply Money Demand Money Demand 1 Money Supply T Q Search 2016 W acer
Suppose the Federal Reserve ("the Fed") shifts to a contractionary monetary policy by selling bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's contractionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to INTEREST RATE (Percent) 15 24 0 0 300 600 Money Supply 900 Money Demand 1200 1500 1800 QUANTITY OF MONEY (Billions of dollars) Money Demand -0- Money Supply The following graph shows the demand for investment. Show the short-run effect of the Fed's contractionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have on the top graph. INTEREST RATE…
What 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 facilities
The graph shows the demand for money curve and the supply of money curve. The Fed decreases the quantity of real money supplied to $3.9 trillion. Draw a new MS curve that shows the effect of the Fed's action. Label it. Draw a point at the new equilibrium quantity of money and interest rate. Before the Fed decreases the quantity of money, the equilibrium interest rate is percent a year. After the Fed decreases the quantity of money, at an interest rate of 4 percent a year, people want to hold money than the quantity supplied, so they bonds. A. more; sell B. less; buy C. less; sell D. more; buy The price of a bond A. falls; falls O B. rises; falls and the interest rate 8- 7- 6- 5- 4- 3- 2- 1- Nominal interest rate (percent per year) 4 0+ 3.8 MS 4.0 MD 4.0 4.1 3.9 Quantity of money (trillions of 2009 dollars) >>> Draw only the objects specified in the questi 4.2
32. Problem 3. The acme bank and storm door company (good old ("AB&SDC") is trying to determine whatever rate of interest they should pay on the New 6 months CDs they are trying to get customers to buy. Looking at the WSJ here's some interest rates they found: Prime: 5%; LI OR: 3.25%; Fed Funds: 1.5%; 10 Month T-Note: 2.42%; 3 month T-bill 1.45%. Believe it or not, AB&SDC had a rather shaky reputation- so much knowledge investors would require an additional 8% to buy Acme's CDs to make up for their high risk of default (ignore maturity and liquidity issues). Given the above, what nominal rate of interest must Acme's CDs have to pay?
2. Equilibrium and disequilibrium in the money market The following diagram represents the money market in the United States, which is currently in equilibrium. INTEREST RATE (Percent) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 0.6 0.7 Money supply 0.9 1.0 1.1 1.2 1.3 0.8 QUANTITY OF MONEY (Trillions of dollars) Money demand the Money demand Money supply ? Suppose the Federal Reserve announces that it is lowering its target interest rate by 75 basis points, or 0.75%. It would achieve this by Shift either the money supply curve or the money demand curve, or both, to illustrate on the graph the effects of this policy. The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there is money in the financial system, the quantity of interest-bearing financial assets such as bonds demanded , which means that bond issuers until the new equilibrium interest rate is achieved. sell the bonds. This process…
The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level increases from 150 to 175. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. INTEREST RATE (Percent) 18 15 12 60 3 0 0 15 Money Supply Money Demand 30 45 60 MONEY (Billions of dollars) 75 90 Money Demand Money Supply (?) After the increase in the price level, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. People will try to other interest-bearing assets, and bond issuers will find that they equilibrium at an interest rate of % than the quantity of money bonds and interest rates until the money market reaches its new their money holdings. In order to do so, people will
3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 4.5 4.0 6 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Money Demand + 0.1 Money Supply 0.3 0.5 0.6 MONEY (Trillions of dollars) 0.2 0.7 0.8 New MS Curve New Equilibrium ? Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing…
Year 2022 2023 Potential Real GDP $18.1 trillion 18.4 trillion Real GDP $18.1 trillion 18.6 trillion Price Level 150 155 Refer to Table 15-6. Suppose the table above 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? Should it raise or lower its interest rate target? How should it conduct open market operations to achieve its goal?
1. It is often said that the Federal Reserve Board typically cares more about inflation and less about unemployment than the administration. If this is true, why might presidents often worry about what the Fed might do to interest rates?
3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 45 40 35 30 2.5 20 1.5 1.0 0.5 0 Money Demand 0.1 Money Supply 02 03 04 0.5 MONEY (Trillions of dollars) 0.6 0.7 0.8 New MS Curve New Equilibrium Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage points. To do this, the Fed will use open- market operations to money by the the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money…
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. What are the Fed's policy tools and which policy tool did the Fed use to increase its assets to $4 trillion? Source: Da The Fed's policy tools include O A. the required reserve ratio, discount rate, and government expenditure B. extraordinary crisis measures, marginal tax rates, and the discount rate OC. open market operations, marginal tax rates, and government expenditure OD. the required reserve ratio, discount rate, and open market operations To increase its assets to $4 trillion, the Fed used O A. the discount rate O B. required reserve ratios O C. a printing press to print more currency O D. large-scale open market operations called quantitative easing Click to select your answer. MacBook A DII 20 D00 000 F12 F10…