The diagrams below depicts the initial equilibrium in the market for reserves. Draw in the diagrams, and explain, how the equilibrium Fed funds rate and the quantity of reserves would change as a result of each policy stated below. a) The Fed conducts a large-scale open market purchase of securities. Federal Funds Rate 4 C lar Federal Funds Rate b) The Fed the initial fed funds rate. 4 4 C NBR R Quantity of Reserves, R increases the interest on reserves above 7 NBR R Quantity of Reserves, R

The diagrams below depicts the initial equilibrium in the market for reserves. Draw in the diagrams, and explain, how the equilibrium Fed funds rate and the quantity of reserves would change as a result of each policy stated below. a) The Fed conducts a large-scale open market purchase of securities. Federal Funds Rate 4 C lar Federal Funds Rate b) The Fed the initial fed funds rate. 4 4 C NBR R Quantity of Reserves, R increases the interest on reserves above 7 NBR R Quantity of Reserves, R

Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781305971509

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 5CQQ

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Suppose that the reserve requirement for checkingdeposits is 10 percent and that banks do not hold anyexcess reserves.a. If the Fed sells $1 million of government bonds,what is the effect on the economy’s reserves andmoney supply?b. Now suppose that the Fed lowers the reserverequirement to 5 percent but that banks chooseto hold another 5 percent of deposits as excessreserves. Why might banks do so? What is theoverall change in the money multiplier and themoney supply as a result of these actions?
Suppose the Bank of Canada buys $500,000 in bonds from Bank 1, and Bank 1 and all other banks have no excess reserves prior to this purchase a. What type of policy is this? OA Contractionary fiscal policy OB Expansionary monetary policy OC Expansionary fiscal policy OD Contractionary monetary policy OE None of the above b. What assets of the Bank of Canada change and by how much? Complete the second column of the following table by in each row entering "0" if the listod item is not an asset and/or does not change positive number representing an increase in an asset, or a negative number representing a decrease in an asset (Do not include the $ symbol in your answers) Change in Asset Cash and foreign deposits Bank notes in circulation Equity Government secunties Government of Canada deposits Members of Payments Canada deposits (reserves) Advance to members of Payments Canada c. What babilities of the Bank of Canada change and by how much? Complete the second column of the following…
“If the demand for reserves did not fluctuate, the Fedcould pursue both a reserves target and an interest-ratetarget at the same time.” Is this statement true, false, oruncertain? Explain.
1. Suppose that the economy has the following money supply and demand equations: Money Supply: M = 8000Money Demand: M= 10,000 – 40,000rwhere money is in billions of dollars and interest rates, r , is written as a decimal(e.g., an interest rate of 10% would be written as .1 in the equation).A. Determine the equilibrium interest rate and quantity of money.B. What will happen in the money market if the interest rate is currently 10%?What is the amount of excess supply of or excess demand for money?C. Show in graph that at this interest rate (10%) there is disequilibrium in themoney market.
Suppose the central bank is following a constantmoney-growth-rate rule and the economy is hit witha severe economic downturn. Use an aggregate supply and demand graph to show the possible effects onthe economy. How does this situation reflect on thecredibility of the central bank if it maintains the moneygrowth rule? How does it reflect on the central bank’scredibility if it abandons the money growth rule torespond to the downturn?
13. of the associated Market of the between with the the Open For in problem, In which WORK IT OUT ABO e ag visit LounchPod by using the URL on the back cover of this be 13. Because of the economic slowdown associated September 18, 2007, and December 16, 2008, lowered the federal funds rate in a series of steps from a high of 5.25% to a rate between zero and 0.25%. The idea was to provide a boost to the economy by increasing aggregate demand. a. Use the liquidity preference model to explain how the Federal Open Market Committee lowers the interest rate in the short run. Draw a typical graph that illustrates the mechanism. Label the vertical axis "Interest rate" and the horizontal axis “Quantity of money." Your graph should show two interest rates, r¡ and r2. b. Explain why the reduction in the interest rate causes aggregate demand to increase in the shor run. c. Suppose that in 2015 the economy is at potential output but that this is somehow overlooked by the Fed, which continues its…
Consider the model of supply and demand for central bank money. Assumethat there there are commercial banks. Suppose that people hold 20% of their moneyin currency and 80% of their money in deposits. The central bank sets the reserve-todeposit ratio at 10%. In the first period, the central bank increases the supply of moneyby $200, buying bonds through Open-Market Operations. Use this information to answerthe following questions:(a) For the second period (after the central bank has injected $200 in theeconomy), calculate: (i) the demand for currency, (ii) the amount of deposit held atthe commercial banks, (iii) the demand for reserves held at the central bank, and(iv) the demand for the high-powered money. How much is the additional moneysupply created at the end of the second period?2(b) How much is the additional money supply created at the end of the thirdperiod?(c) As time continues, additional money supply will be created. Calculatethe total increase in the money supply as a…
r the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current chair, what will happen to interent raten? OA. Slower money growth will lead to a liquidity effect, which will raise interest ratos. Moreover, the lower income, price level, and inflation wil reinforce the increane in interest rates OB. Slower money growth will lead to a liquidity effect, which will raise interest rates; however, the lower income, price level, and inflation wil tend to lower interest rates. OC. Slower money growth will lead to a liquidity effect, which will lower interest rates; however, the lower income, price level, and inflation wil tend to raise interest rates. O D. Slower money growth will lead to a liquidity effect, which will lower interest rates. Moreover, the lower income, price level, and inflation will reintoron he decrease in interest rates.
. Assume that the banking system has total reservesof $100 billion. Assume also that required reservesare 10 percent of checking deposits and that bankshold no excess reserves and households hold nocurrency.a. What is the money multiplier? What is the moneysupply?b. If the Fed now raises required reserves to20 percent of deposits, what are the change inreserves and the change in the money supply
Nobel Prize winner Franco Modigliani found that themost important transmission mechanisms of monetarypolicy involve consumer expenditure. Describe how atleast two of these mechanisms work
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Question 10a. (i).Draw a graph showing equilibrium in the money market. Carefully label all curves andaxes and explainwhy the curves have the slopesthey do.(ii). Using the graph you prepared in a(i), illustrateand explain what happens when the Central Bankdecreases the money supply.(iii).When the Central Bank decreases the money supply, the equilibrium level of income changes. Illustrate andexplain how.