The Federal Reserve System was established to provide a stable monetary system for the entire economy. The Federal Reserve Bank (the Fed) has three major tools to control the money supply: 1) reserve requirements, 2) discount window for loans to member banks, and 3) open market operations. When the economy is in a recessionary mode, what will likely be the actions by the Federal Reserve using monetary policy? Suppose the Federal Reserve purchases a $100,000 bond from John Doe, who deposits the proceeds in the Manufacturer's National Bank; what will be the impact of this transaction on the supply of money? How do each of the Fed's tools work?

The Federal Reserve System was established to provide a stable monetary system for the entire economy. The Federal Reserve Bank (the Fed) has three major tools to control the money supply: 1) reserve requirements, 2) discount window for loans to member banks, and 3) open market operations. When the economy is in a recessionary mode, what will likely be the actions by the Federal Reserve using monetary policy? Suppose the Federal Reserve purchases a $100,000 bond from John Doe, who deposits the proceeds in the Manufacturer's National Bank; what will be the impact of this transaction on the supply of money? How do each of the Fed's tools work?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Between 1950 and 1975, the average annual rate of change in the money supply was slightly less than 4 percent. Has the Fed expanded the money supply more (or less) rapidly than this 4 percent long-term rate during the past 12 months? The past 24 months? Is the Fed's current monetary policy restrictive or expansionary? Explain.
Suppose that the Federal Reserve has set a reserve requirement of 10 percent and that banks will not hold any excess reserves. a) If the Federal Reserve conducts open market operations and sells $1 million worth of government bonds to the public, by how much will the money supply decrease? b) Now suppose the Federal Reserve lowers the reserve requirement to 5 percent, but all banks choose to hold an additional 5 percent of deposits as excess reserves. How will this change affect the money supply? Explain.
Suppose a central bank has a required reserve ratio of 6.6% for all banks and the central bank changes reserves at one of these banks by $536. By how much will the money supply change, at most, after all the effects of the money multiplier? (Round this to two digits after the decimal and enter this value as either a positive value or a negative value without the dollar sign.)
Suppose the federal funds rate is not close to zero, risk spreads are roughly constant so that different interest rates rise and fall together, and banks are not holding many excess reserves. Federal Reserve open-market operations are done mostly in Treasury bills. Such economic conditions are referred to as “normal times.” Part A: Suppose the Federal Reserve implements an expansionary monetary policy by _______ (buying or selling) bonds through open-market operations. The following graph shows the demand and supply of bank reserves. On the graph, show the effect of the Fed's expansionary monetary policy by shifting one or both of the curves. As a result of the Fed's expansionary policy, the interest rate _______ (falls or rises) to ______(10%, 6%, 2%, 12%, 8%, 4%) Part B. Investment is one component of total spending. The following graph shows the demand for investment. Use the information from the previous graph to show the short-run effect of the Fed's…
Targeting the federal funds rate ( is, is not ) as important a tool today as it was before the 2007-2009 financial crisis. During the financial crisis when the federal funds rate was near zero, the Fed ( did, did not ) wish to go lower than zero and came up with alternatives to influence interest rates and lending: the administered rates. Today, the Fed still sets a target for the federal funds rate but finds it more effective to change the administered rates. By doing that, the Fed can stimulate or restrict lending. The federal funds rate is the Feds policy rate and (is, is not ) useful when providing forward guidance. 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.
Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply. The Fed cannot prevent banks from lending out required reserves. The Fed cannot control whether and to what extent banks hold excess reserves. The Fed cannot control the amount of money that households choose to hold as currency.
Suppose you win on a scratch-off lottery ticket and you decide to put all of your $3,500 winnings in the bank. The reserve requirement is 5%. What is the maximum possible increase in the money supply as a result of your bank deposit? maximum increase: $ Which events could cause the increase in the money supply to be less than its potential? Banks choose to loan out all excess reserves. Some loan recipients choose to hold some cash instead of depositing all of it in banks. Banks decide to keep some excess reserves on hand. All money loaned out is deposited back into the banking system.
To counter the economic disruption resulting from the 2020 pandemic, the Federal Reserve reduced the commercial bank reserve requirement to 0% instead of 10% in 2019. Please discuss how this Federal Reserve action supported the economic recovery from the pandemic and affected the money supply. In addition, the Federal Reserve started buying monthly $80 billion of US Treasury bonds and $40 billion of Mortgage Backed Securities. Please discuss how this Federal Reserve action supported the economic recovery from the pandemic and affected the money supply and yields/interest rates.
If the Federal Reserve wanted to offset a cyclical downturn in overall expenditures, it should sell bonds to decrease the money supply thus increasing the interest rates to decrease business investment and therefore decreasing the overall level of expenditures and decreasing the price level. buy bonds to decrease the money supply thus increasing the interest rates to decrease business investment and therefore decreasing the overall level of expenditures and decreasing the price level. sell bonds to increase the money supply thus decreasing the interest rates to increase business investment and therefore increasing the overall level of expenditures and increasing the price level. buy bonds to increase the money supply thus decreasing the interest rates to increase business investment and therefore increasing the overall level of expenditures and increasing the price level.
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