(i) What is the relationship between the two variables as shown in table 1 and why does this relationship exist? (ii) Assume the quantity of real money supplied (money supply) is $3M when interest rates are at 5%. Describe what is occurring when interest rates are at 7%? (iii) Assume the Reserve Bank of Economy X wants to achieve a new equilibrium interest rate of 3%. What would be the likely problem facing economy X for the Reserve Bank to take this action? Describe the process on how (transmission mechanism) the Reserve Bank can solve the problem of economy X.

(i) What is the relationship between the two variables as shown in table 1 and why does this relationship exist? (ii) Assume the quantity of real money supplied (money supply) is $3M when interest rates are at 5%. Describe what is occurring when interest rates are at 7%? (iii) Assume the Reserve Bank of Economy X wants to achieve a new equilibrium interest rate of 3%. What would be the likely problem facing economy X for the Reserve Bank to take this action? Describe the process on how (transmission mechanism) the Reserve Bank can solve the problem of economy X.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that the demand for money function was MD = 4Y − 1000i where MD is the quantity of money demanded, i is the rate of intest (an interest of 5 means 5 percent in this problem), and Y is real national income, which currently is 1500. The supply of money is 1000, currency in circulation outside the banking system is 100, the target reserve ratio is 10 percent, there is no cash drain in the banking system, and the recessionary gap is 250. The price level does not change in this problem. What is the level of cash reserve of the banking system?
If Money Supply increases, the equilibrium interest rate will: a) be ambiguous b) increase c) decrease d) not change
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Challenge Problem. The chapter mentions that an open market operation by the Fed can increase or decrease the quantity of deposits in banks and therefore the money supply. The change in the money supply from a Fed open market operation is given by the following equation: Change in money supply = Change in reserves x1/ (RR+ ER) where RR = the percentage of deposits that banks are required to keep as reserves ER = the percentage of deposits that banks voluntarily hold as excess reserves 1/ (RR+ ER) = the "money multiplier" Suppose the Fed decides to sell $16 billion in Treasury bonds. Assume that the reserve requirement is 10 percent, banks hold 3 percent in excess reserves, and the public holds no cash. This action by the Fed causes the money supply to by S billion. (Round your response to two decimal places.)
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Federal Funds Rale The graph to the right illustrates how the Fed uses discounting to keep the federal funds rate from rising far above the federal funds target. It shows a rightward shift of the demand curve for reserves from R to R. The initial equilibrium is at point 1, where the discount rate (a) is above the federal funds rate, which is equal to its target level, i. The shift moves the equilibrium to point 2, where the federal funds rate equals the discount rate ( =l4). According to this graph, at point 2, borrowed reserves are: !3! A. equal to the distance between B and C. B. equal to the distance between A and B. C. equal to the distance between A and C D. zero.
Suppose the Fed announces that it is raising its target interest rate by 25 basis points, or 0.25 percentage point. 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 the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will the cost of borrowing, causing residential and business investment spending to and the quantity of output demanded to at each price level. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
The following graph shows the market for federal reserves. The kinked orange curve Supply FF shows the supply of federal funds. It is vertical at the current amount of available reserves and flattens when the federal funds rate reaches the prevailing discount rate. The blue curve shows the demand for federal funds, which is downward sloping. Suppose that the prevailing federal funds rate is 2% and the discount rate is 4%. The current amount of bank reserves is $2 million. Suppose the Federal Reserve implements a contractionary policy by selling $1 million worth of government securities in open market operations. On the following graph, show the effect of a contractionary OMO on the Fed funds market. (Hint: Use the green points (triangle symbols) to plot the two-part supply curve and the grey point (star symbol) to show the new federal funds rate.) FEDERAL FUNDS RATE 5 0 0 The Market for Federal Reserves Supply FF 2 QUANTITY OF EXCESS RESERVES (Millions of Dollars) 3 As a result of a…
Q1. Suppose that money demand is given by the following function MD=$Y (0.5 - i) and that nominal GDP is given by $200. Moreover, assume that the monetary base is given by H³ = $8. It is also known that people in this economy hold all their wealth either in form of checkable deposits or in form of bonds (i.e. people hold no currency) and that banks must hold 10% of the checkable deposits as reserves. (a) Calculate the money market equilibrium using that the supply and the demand for central bank money is equal. (b) Calculate the overall supply of money. (c) What happens to the money market equilibrium if the central bank decides to increase the monetary base to Hs = $9? (d) What are the effects on the overall money supply in the economy? (Calculate the new overall supply of money and explain your result.)
Using the supply and demand analysis (i.e., diagrams)of the market for reserves, indicate what happens to the federal funds rate, borrowed reserves, and nonborrowed reserves, holding everything else constant, under the following situations. Please use diagrams a. The economy is surprisingly strong, leading to an increase in the amount of checkable deposits. b. Banks expect an unusually large increase in withdrawals from checking deposit accounts in the future. c. The Fed reduces reserve requirements and then offsets this action by conducting an open market sale of securities. d. The Fed raises the interest rate on reserves above the current equilibrium federal funds rate.
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $100. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 25 10 A lower reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $100. Again, you can assume 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 bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions.…
Scenario 2 Suppose the money demand is given by MdYx (0.4 - i) = where i is the interest rate. Suppose income Y totals 250. 9. Refer to Scenario 2. If the money supply is M³ = 25, what is the equilibrium interest rate? 10. Refer to Scenario 2. Suppose the Federal Reserve just met and decided they would like to decrease the interest rate by 4 percentage points (compared to the equilibrium rate you found in the previous question). What kind of monetary policy should it use, and what would the money supply have to equal to achieve that goal? (Your answer should be two items: first is expansion or contraction, the second is the actual amount the money supply should be.)