Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 29, Problem 2.3P
To determine
Role of implementation lags and response lags in
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The Federal Reserve System's Board of Governors and the Federal Government both
maintained expansionary (loose) monetary and fiscal policies during the last
economic recession. For the purposes of this essay, assume that recent economic
data shows unemployment is increasing significantly again and that the economy is
still slowing. We are in a recession.
Identify and explain in detail the three monetary policy tools that the Board of
Governors could use to fix this recession and the two fiscal policy tools that the
Federal Government could adopt to address the problem. Be specific in explaining
what the tools are, how they work, what they are fixing, and how the actions of the
Fed and Government will affect people's spending and saving habits, aggregate
demand in the economy, and the amount of money in circulation.
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.
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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.
(Problem 3, Page 439) Suppose that the Fed has a policy of increasing the money
supply when it observes that the economy is in recession. However, suppose that
about six months are needed for an increase in the money supply to affect
aggregate demand, which is about the same amount of time needed for firms to
review and reset their prices. What effects will the Fed's policy have on output
and price stability? Does your answer change if (a) the Fed has some ability to
forecast recessions or (b) price adjustment takes longer than six months?
Chapter 29 Solutions
Principles of Economics (12th Edition)
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- Using the following formula, how much would the Fed have had to reduce long-term interest rates to get the same stimulus as President Trump’s $200 billion increase in government spending? Bernanke’s policy guide: 1/4 point reduction in long-term interest rate = $50 billion fiscal stimulusarrow_forwardPlease answer question 4:arrow_forwardWhat is one of the advantages of monetary policy over fiscal policy? 1) its control over the size of Federal budget deficits 2) the quickness with which it can be used 3) the opportunity for broad political influence 4) It can guarantee an expansion of aggregate demand when needed.arrow_forward
- Match the correct policy with its description. Column A 1. 2. 3. 4. During a contraction or recession, the government can do two things: Decrease Taxes Or Increase Spending During a period of excessive inflation (during a period of expansion), the government can do two things: Increase Taxes Or Decrease Spending Increased lending by banks to customers (increased money supply) Lower Interest Rates on loans and bank accounts Increased borrowing from the Fed by banks Decreased lending by banks to customers (decreased money supply) Higher Interest Rates on loans and bank accounts Decreased borrowing from the Fed by banks % 5 M Column B a. Expansionary Fiscal Policy b. Contractionary Monetary Policy c. Contractionary Fiscal Policy d. Expansionary Monetary Policyarrow_forwardQ7.On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (December 4, 2020) decided tokeep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 percent.Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent. Assess the present liquidity scenario in India and give your opinion about the impact of this reduction on money supply and also suggest other measures that RBI can take in recent times to maintain liquidity.arrow_forwardYou will answer the following questions listed below. You will submit a Word document that will answer the following questions. Please submit your work using proper APA formatting. What actions should the Fed take if it believes the economy is about to experience a high rate of inflation? Now, let’s assume you are the President of the Fed and you have to make certain decisions in our economy. If the Fed orders a contractionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy: The money supply Interest rates Investment Consumption Net Exports The aggregate demand curve Real GDP The price level It should be minimum 3 word count with work cited page please.arrow_forward
- Which of the following statements is (are) correct with regard to Lags in Monetary Policy versus Fiscal Policy? Statement 1: An inside lag exists between the time a policy change is needed and the time the Fed identifies the problem and decides which policy tool to use. The inside lag for monetary policy is shorter than for fiscal policy because fiscal policy is usually the result of a long political budget process. Statement 2: An outside lag occurs between the time a policy decision is made and the time the policy change has its effect on the economy. Statement 3: The total lag (inside plus outside lags) is longer for monetary policy than it is for fiscal policy. O Statements 2 and 3 only. O Statement 3 only. O All statements. O Statements 1 änd 2 only.arrow_forwardThe major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would tend to offset each other in trying to achieve that objective? selling government securities and raising the discount rate selling government securities and raising the reserve ratio .buying government securities and raising the discount rate buying government securities and lowering the reserve ratioarrow_forwardq2.2arrow_forward
- Nonearrow_forwardThe former chairman of the Federal Reserve, Alan Greenspan, used the term "irrational exuberance" in 1996 to describe the high levels of optimism among stock market investors at the time. Stock market indexes such as the S&P Composite Price Index were at an all-time high. Some commentators believed that the Fed should intervene to slow the expansion of the economy. Why would central banks want to clamp down when the economy is growing?arrow_forwardQuestion #3: Consider an economy described by the following set of values: C = $3.25 trillion mpc = 075 1 = $1.2 trillion d = 0.30 G = $3.5 trillion T = $3 trillion NX = $1.5 trillion f=1 What is the expression for the Monetary Policy (MP) curve? x = 01 λ=1 r=2 What is the expression for the Aggregate Demand (AD) curve? Assume that =1%. What is the real interest rate (r)? and equilibrium level of output? Suppose the Bank of Canada increases r to r=3.5. What is the new real interest rate and new equilibrium level of output? What type of monetary policy did the Bank undertake? What would be the reason the bank that the Bank would undertake this type of policy? (Maximum 2 sentences)arrow_forward
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