Economics:
10th Edition
ISBN: 9781285859460
Author: BOYES, William
Publisher: Cengage Learning
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Chapter 13, Problem 7E
To determine
(a)
There are several tools that the Fed uses to implement the
Briefly describe these tools.
To determine
(b)
There are several tools that the Fed uses to implement monetary policy.
State the process of Fed uses for each tool in order to increase the money supply.
To determine
(c)
There are several tools that the Fed uses to implement monetary policy.
Suppose the federal funds rate equals zero. Does that mean the Fed can do nothing to stimulate the economy.
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The Federal Reserve manages the amount of money in circulation by buying or selling U.S. Treasury securities, usually Treasury bills. The increase or decrease of money in circulation helps the Fed to control inflation or deflation. This has an effect on your disposable income. Research the Federal Reserve system and money supply, then answer the following questions.
Under what conditions would the Fed choose to decrease the money supply, how would it do so, and what is the goal of doing so? How does the Fed factor inflation into its actions?
The Federal Reserve annual report. Visit the Federal Reserve www.federalreserve.gov, and select "Monetary Policy." Then click on "Reports" and "Monetary Policy Report " to retrieve the current annual report (parts 1 and 2). Summarize the policy actions of the Board of Governors during the most recent period. In the Fed's opinion, how did the U.S. economy perform?
A problem that the Fed faces when it attempts to control the money supply is that
the Fed can only control excess reserves but not total reserves.
the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its monetary policy tools.
the Fed does not have a tool that it can use to change the money supply by either a small amount or a large amount.
the Fed does not control the amount of money that households choose to hold as deposits in banks.
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- pick one of the four tools the Fed uses to conduct monetary policy and discuss how it causes a change in interest rates in the US economy.arrow_forwardIn this Decision Point activity you learned about how changes to monetary policy by the Federal Reserve should impact your own decisions and the decisions of everyone across the economy. Apply what you learned in this decision point to the following questions. One of the tools the Fed uses to influence interest rates is to pay banks interest on excess reserves they hold overnight with the Fed. You're a director at a bank. Your bank currently holds $185 million in excess reserves at the regional Fed and you're earning an annual rate of 2.42% on those excess reserves sitting at the Fed. The Fed decides to decrease the interest rate it pays on excess reserves from an annual rate of 2.42% to 1.55%. In response, you should the amount of excess reserves held at the Fed and make any given interest rate. loans atarrow_forwardSuppose that the Bank of Canada determines that the Canadian economy is currently overproducing. What can the Central Bank do to slow down economic activity? a. The Central bank can pursue an expansionary monetary policy by increasing the money supply, causing a decrease in the interest rate. As a result, real GDP will increase and the price level will increase. b. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing a decrease in the interest rate. As a result, real GDP will decrease and the price level will decrease c. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing an increase in the interest rate. As a result, real GDP will decrease and the price level will decrease. d. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing an increase in the interest rate. As a result, real GDP will decrease and the price level will increase e. The…arrow_forward
- 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_forwardIt is 2019 and our economy has been growing too fast. The Fed is worried that inflation could become a serious problem in the near future. The Fed wants to cool the economy off before it crashes. Which one tool of monetary policy that the Fed could use to achieve this goal. how this tool could fix the economy by referencing what happens to interest rates, the money supplyprice levelsreal GDP and unemployment.arrow_forwardWhen economists speak of the "zero lower bound problem" that the Fed sometimes faces, what are they referring to? 1. It is when short term interest rates are close to zero meaning the Fed can no longer use changes in interest rates to stimulate the economy 2. It is when economic growth in the economy has reached zero percent and the Fed must use aggressive monetary policy 3. It is when the Fed has sold all the securities on its balance sheet and can no longer impact the money supply using open market operations 4. It is when banks choose to hold no excess reserves, making it impossible for the Fed to lower the discount ratearrow_forward
- Suppose the economy is initially at long run equilibrium, when there is an unexpected decrease in oil prices in the country.How does this impact the economy? (write out either "inflationary" or "recessionary" In response to this what monetary policy would the Fed employ? (write one of the following: "raise taxes", "lower taxes", "raise money supply", or "lower money supply"What is the most likely way the Fed will accomplish this change in the monetary policy? (write one of the following: "buy securities", "sell securities", "raise discount rate", "lower discount rate", or "legislation"This action by the Fed will cause interest rates to _______. (Write out "increase" or "decrease"The end result of the monetary policy is a shift of which curve in which direction. (Write out one of the following: "AD right", "AD left" "AS left", "AS right"arrow_forwardCarefully explain how the Federal Reserve (Fed) will use each of the three monetary policy tools at its disposal to decrease the money supply.arrow_forwardWhat’s the monetary policy? Why the Fed implements the monetary policy?arrow_forward
- Which of the below statements DOES NOT CORRECTLY describe the immense power or policy choice of the Federal Reserve (the Fed)? Group of answer choices 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. The Federal Reserve controls the money supply and therefore the credit tap for the economy. The Fed can use monetary policy to counteract economic downturns or prevent them from happening. When the Fed opens the credit tap and increases the money supply, interest rates rise and people buy less and borrow less.arrow_forwardAssume the economy is suffering from massive inflation and you are the Chairperson of the FED. What type of monetary policy would you employ and describe what changes are made to the “three tools” of monetary policy. Describe the subsequent impact on the money supply, interest rates, aggregate spending, and real GDP.arrow_forwardWhich one of these policies should the Fed engage in if unemployment is very high and inflation is under control? Select one: a. Buy government bonds through an Open Market Operation b. Print more money and give it directly to tax payers c. Lower corporate and income taxes d. Raise the discount rate e. Lower consumer confidencearrow_forward
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