Economics: Principles & Policy
Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 29, Problem 5DQ
To determine

The consequences of a fall in the federal funds rate into zero.

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Let’s pretend the economy is in a horrible recession, inflation is rising, and interest rates are sky-high. As the chair of the Fed, what monetary role are you going to take? Why?
You often read in the newspaper that the Fed has just lowered the discount rate.  Does this signal that the Fed is moving to a more expansionary monetary policy? Why or why not?
When 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 rate
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