Using T-accounts, explain what happens to reserves when the Federal Reserve sells T- bills. 3) Because it is the case that T-bills are considered safe assets, when any unusual event occurs, there is normally a rush into T-bills, i.e., the demand for T-bills increases. Using words and graphs, explain what will happen to the interest rate on T-bills. Now explain what impact this will have on the federal funds rate, again using both words and graphs.

Using T-accounts, explain what happens to reserves when the Federal Reserve sells T- bills. 3) Because it is the case that T-bills are considered safe assets, when any unusual event occurs, there is normally a rush into T-bills, i.e., the demand for T-bills increases. Using words and graphs, explain what will happen to the interest rate on T-bills. Now explain what impact this will have on the federal funds rate, again using both words and graphs.

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

Introduction to Macroeconomics Required Reserves and the Money Multiplier When a bank receives a deposit, it must set aside part of it according to the established reserve requirement. The remaining funds are excess reserves and can be lent out, In our economy of multiple banks, it is very likely that the proceeds of the loan will end up on deposit at another bank. When that happens, the process repeats itself: The bank sets aside required reserves and can lend out its excess reserves. The result is the money multiplier process. Use the table that follows to learn more about this process. The table begins with an initial deposit of $1,000 to one bank and assumes a required reserve ratio of 15%. Assume the amount lent by one bank is always deposited in another. 1. Calculate the amount of required reserves, excess reserves, and lending at each step in the process. The first boxes of the table are filled in to get you started. Continue until you have filled in five rows of numbers. 2. Now…
Suppose that the market for bank reserves in the United States is as depicted in the graph. Manipulate the graph to illustrate how the Fed reaches the target federal funds rate. Federal funds rate Supply of reserves A Federal funds rate (current) Federal funds rate (large) Supply of reserves Federal funds rate (current) Federal funds rate (target) Demand for reserves Reserves on depsoit at the Fed How would the Fed reach this inflation target? The Fed would sell securities in an open market operation. increase the number of loans made to consumers. O buy securities in an open market operation. reduce taxes on bank deposits. lower the interest rate in the money market. increase aggregate prices.
EconomyRead the following premise carefully and answer the questions specifically and in detail. "Faced with instability in economic growth due to a recession or accelerated inflation, the Fed uses the open market operation to increase or decrease the available reserves of commercial banks which, in turn, will affect the amount of money available in the economy. economy In addition to open market operation, the Fed has other tools available to promote the growth, sustainment and economic stability of a country.These tools have been used historically; "A good example was the mortgage debt crisis of 2008." 1. Explain in detail monetary policy, its function and its effects on short- and long-term economic fluctuations. Use the aggregate demand and supply model presented in the course. 2. Explain each of the tools that exist in expansionary monetary policy and contractionary monetary policy.
2. What is the relationship between money demand and interest rates? What happens when the interest rate reaches the zero lower bound?
19
Consider the following equations describing real money demand: M/P=Y(4-1.5i) So, if output (Y) in the economy is 820 million USD, National bank decide to print (M) 200 million USD and price level (P) is 5, what is equilibrium level of interest rate in the economy?
Suppose the reserve requirement is 8% and a new deposit of $900 billion is made into the banking system. Create T accounts to analyze the following questions. a) Initially, reserves would increase by? b) Required reserves would increase by? c) Excess reserves would increase by? d) The first round of loans would amount to? e) The second round of loans would amount to approximately? f) The third round of loans would amount to approximately? g) For the entire macroeconomy, after the infinite rounds of loans were taken into account, money supply would increase by? h) If the Federal Reserve bought bonds worth $600 billion, money supply would increase by? i) If the Federal Reserve sold bonds worth $600 billion, money supply would decrease by?
Given the latest data on the state of the U.S. economy, the Fed signals the next increase in the target for the federal funds. The increase won’t happen until the Fed’s meeting in December of 2016. Explain the following • What open market operations the Fed would have to take to achieve the stated desired change in the federal funds rate? • What will happen to bonds prices and interest rates associated with these bonds? • Is the Fed making the policy more expansionary or contractionary? Explain why?
8. Macroeconomic factors that influence interest rate levels Apart from risk components, several macroeconomic factors-such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity-influence interest rates. Based on your understanding of the impact of macroeconomic factors, identify which of the following statements are true or false: Statements When the Fed increases the money supply, short-term interest rates tend to decline. If the Fed injects a huge amount of money into the markets, inflation is expected to decline, and long-term interest rates are expected to rise. During recessions, short-term interest rates decline more sharply than long-term interest rates. When the economy is weakening, the Fed is likely to decrease short-term interest rates. True False O O O O O O
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…
Suppose the Federal Reserve (the Fed) announces that it is lowering its target interest rate by 75 basis points, or 0.75%. It would achieve this by ______the ________. Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money. 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, there is an excess _________ money at the initial equilibrium interest rate. Individuals and businesses adjust their asset portfolios by _______bonds. As a result, the price of bonds_________ , and the interest rate______ . This process continues until the new equilibrium interest rate is achieved.
[Related to Solved Problem 5.26] Use the data on Treasury securities in the following table to answer the question: 2 year Date 03/05/2010 1 year 0.36% 0.88% 3 year 1.49% Source: U.S. Department of the Treasury. Assuming that the liquidity premium theory is correct, on March 5, 2010, what did investors expect the interest rate to be on the one-year Treasury bill two years from that date if the term premium on a two-year Treasury note was 0.05% and the term premium on a three-year Treasury note was 0.06%? The expected interest rate is%. (Round your response to two decimal places.)