Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 11, Problem 2.1P
To determine
Fed, investment spending, and the federal funds rate.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
The Federal Reserve Board of Governors has the power to raise or lower short-term interest rates. Between 2005 and 2006, the Fed aggressively increased the benchmark federal funds interest rate from 2.5 percent in February 2005 to 5.25 percent in June 2006, where it remained until July 2007. From July 2007 to December 2008, the Fed rapidly decreased the federal funds rate, where it dropped to 0.16 percent and remained between 0.07 percent and 0.20 percent through November 2015, after which it again began to rise. Assuming that other interest rates also increased and then decreased along with the federal funds rate, what effects do you think those moves had on investment spending in the economy? Explain your answer. What do you think the Fed’s objective was in increasing and then decreasing the federal funds rate? When and why might the Fed decide to start raising the federal funds rate?
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.
In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a “soft patch” in the economy, in particular the possibility of a deflation. As a result, the Fed proactively lowered the federal funds rate from 1.75% in late 2002 to 1% by mid-2003, the lowest federal funds rate on record up to that point in time. In addition, the Fed committed to keeping the federal funds rate at this level for a considerable period of time. This policy was considered highly expansionary and was seen by some as potentially inflationary and unnecessary.
a. How might fears of a zero lower bound justify such a policy, even if the economy was not actually in a recession?
b. Show the impact of these policies on the MP curve and the AD/AS graph. Be sure to show the initial conditions in 2003 and the impact of the policy on the deflation threat.
Chapter 11 Solutions
Principles of Economics (12th Edition)
Ch. 11.A - Prob. 1PCh. 11.A - Prob. 2PCh. 11.A - Prob. 3PCh. 11.A - Prob. 4PCh. 11.A - Prob. 5PCh. 11.A - Prob. 6PCh. 11.A - Prob. 7PCh. 11.A - Prob. 8PCh. 11.A - Prob. 9PCh. 11.A - Prob. 10P
Ch. 11.A - Prob. 11PCh. 11.A - Prob. 12PCh. 11 - Prob. 1.1PCh. 11 - Prob. 1.2PCh. 11 - Prob. 1.3PCh. 11 - Prob. 2.1PCh. 11 - Prob. 2.2PCh. 11 - Prob. 2.3PCh. 11 - Prob. 2.4PCh. 11 - Prob. 2.5PCh. 11 - Prob. 2.7PCh. 11 - Prob. 2.8PCh. 11 - Prob. 2.9PCh. 11 - Prob. 3.1PCh. 11 - Prob. 3.2PCh. 11 - Prob. 3.3PCh. 11 - Prob. 3.4PCh. 11 - Prob. 3.5PCh. 11 - Prob. 3.6P
Knowledge Booster
Similar questions
- The Federal Reserve does not target both the money supply and an interest rate because it would be too confusing to Wall Street and would disrupt the financial markets. it would be too easy for Wall Street to determine what policy the Fed is following and this would destabilize the economy. it would be illegal according to the Federal Reserve Act. the Fed cannot achieve a target for both the money supply and an interest rate at the same time.arrow_forwardNaked Economics: Undressing the Dismal Science Book by Charles Wheelan Please refer to the chapter titled, "The Federal Reserve," in the Naked Economics book to answer this question. Which of the below statements DOES NOT CORRECTLY describe the immense power or policy choice of the Federal Reserve (the Fed), as explained in this chapter? 1) The Federal Reserve controls the money supply and therefore the credit tap for the economy. 2) The Fed can use monetary policy to counteract economic downturns, or prevent them from happening. 3) The Fed can inject money into the financial system after sudden shocks, such as the 1987 stock market crash or the terrorist attacks on Sept. 11, 2001. 4) When the Fed opens the credit tap and increases the money supply, interest rates rise and people buy less and borrow less.arrow_forwardThe Fed's $2.2 trillion fire hose The Fed threw a lot of money at the financial crisis in 2008 to unfreeze credit markets and encourage economic activity. As part of its effort to keep the interest rate low, the Fed purchased government bonds worth $300 billion between March and September 2009. By October, the Fed held $770 billion in government securities, nearly double its pre-crisis total. Before the crisis, the Fed held mainly government securities, which it used to control the quantity of money in the economy. Now government securities make up just 35% of the Fed's balance sheet. Source: CNN Money, October 9, 2009 If government securities make up just 35 percent of the Fed's assets, calculate the Fed's total assets. What effect did the Fed's purchase of $300 billion of government bonds have on the Fed's total liabilities? If government securities make up 35 percent of the Fed's assets, then the Fed's total assets are $ The Fed's purchase of $300 billion of government bonds…arrow_forward
- If the Federal Reserve is targeting interest rates and money demand decreases, an appropriate policy response would be to: Increase reserve requirements. Decrease the discount rate. Purchase U.S. Treasury securities through government bond dealers. Decrease government spending.arrow_forwardOn March 26, 2020, the Federal Reserve abolished reserve requirements (the required reserve ratio = 0%). What two major considerations led the Fed take such an unprecedented actionarrow_forwardEconomics [Related to the Making the Connection] At an August 2011 meeting of the FOMC, three Federal Reserve Bank presidents publicly dissented from a decision to maintain the federal funds rate at a near-zero level through 2013. (At a later meeting the date was extended through mid-2015.) The dissents were notable because FOMC members have typically voted unanimously on interest rate decisions. One of the dissenting votes came from Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, who explained that he favored low interest rates but objected to the Fed making a commitment to maintain low rates over a specific period of time. He stated that the decision would make it more difficult to maintain the Fed's commitment to keep the rate of inflation from exceeding its target of 2%. Source: Brad Allen, "Kocherlakota's Priority: Federal Reserve Transparency," Minnpost.com, February 15, 2012. Kocherlakota's reasoning may have been that A. a prolonged period of…arrow_forward
- 2. The theory of liquidity preference and the downward-slopingaggregate demand curve 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 decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. 12 Money Supply 10 Money Demand Money Supply MD1 2 MD2 10 20 30 40 50 60 MONEY (Billions of dollars) INTEREST RATE (Percent)arrow_forwardSuppose the Federal Reserve has set the money supply at $4 million. The table below shows the interest rate and total demand for money. Interest Rate Demand (in millions) 20% $1 15 2 10 3 5 4 0 5 What is the equilibrium interest rate? Multiple Choice 0 percent 20 percent 10 percent 5 percentarrow_forward"Fed Chair Jerome Powell said he supports a traditional quarter-point increase in the Federal Reserve's benchmark short-term interest rate when the Fed meets later this month, rather than a larger increase that some of its policymakers have proposed." - ABC News, March 2, 2022 If the Federal Reserve increases the Federal Funds Rate this month, then which of the following is likely to happen in the US economy? Money supply will decrease and aggregate demand will decrease Money supply will increase and aggregate demand will increase Money supply will decrease and aggregate demand will increase Money supply will increase and aggregate demand will decreasearrow_forward
- Why did the Fed switch from increasing Federal Reserve target rates from Dec 2015 to Dec 2018 to reducing interest rates in August 2019?arrow_forwardArticle Summary In a September 2019 tweet, President Trump said that Fed officials should cut interest rates to zero or below, adopting a policy that has been used in Europe and Japan. Negative interest rates would result in commercial banks paying the Fed interest for funds kept at the central bank instead of banks receiving interest on their reserves. If negative rates become a reality in the United States, consumers may end up having new fees to pay on their bank accounts and investors could be faced with negative yields on government bonds. President Trump has pushed for zero or negative interest rates to spur the economy and to combat the strengthening dollar in European markets, where negative rates have weakened the euro and made U.S. exports less competitive. Critics of possible negative interest rates have pointed to the mixed results in Europe, with some reports stating that lending has increased because of the rates, and other reports stating the opposite. Some critics have…arrow_forwardIf 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.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning