Economics, Student Value Edition (7th Edition)
7th Edition
ISBN: 9780134739229
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 28, Problem 28.4.11PA
Sub part (a):
To determine
The independence of Fed and accountability to the elected government.
Sub part (b):
To determine
The independence of Fed and accountability to the elected government.
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Briefly describe how the Fed would use its three main policy tools to stimulate the economy.
(1) The Fed should increase or decrease the benchmark rates such as Fed funds rate? Briefly explain Why.
(2) The Fed should buy or sell Treasury securities? Briefly explain Why.
(3) The Fed should increase or decrease the bank reserve requirement ratio? Briefly explain Why.
A news website might have this headline: “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent.” A more detailed account of the Fed’s action would say:
“Today the Fed told its bond traders to sell enough bonds in open-market operations to make the federal funds rate decrease to 5.25 percent.”
“Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.”
“Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.”
“Today the Fed told its bond traders to buy enough bonds in open-market operations to make the federal funds rate decrease to 5.25 percent.”
According to Keynes, increasing the money supply should lower interest rates in the economy. Milton Friedman notes that while it is true that expansionary monetary policy can lower interest rates, it is only part of the story.
a. Briefly explain under what conditions an expansionary monetary policy will indeed lower interest rates, both in the short and long run. A graph may help answering this question.b. Briefly explain under what conditions an expansionary monetary policy will increase interest rates. A graph may help answering this question.
Chapter 28 Solutions
Economics, Student Value Edition (7th Edition)
Ch. 28 - Prob. 28.1.2RQCh. 28 - Prob. 28.1.3RQCh. 28 - Prob. 28.1.4RQCh. 28 - Prob. 28.1.5PACh. 28 - Prob. 28.1.6PACh. 28 - Prob. 28.1.7PACh. 28 - Prob. 28.1.8PACh. 28 - Prob. 28.1.9PACh. 28 - Prob. 28.1.10PACh. 28 - Prob. 28.1.11PA
Ch. 28 - Prob. 28.1.12PACh. 28 - Prob. 28.1.13PACh. 28 - Prob. 28.2.1RQCh. 28 - Prob. 28.2.2RQCh. 28 - Prob. 28.2.3PACh. 28 - Prob. 28.2.4PACh. 28 - Prob. 28.2.5PACh. 28 - Prob. 28.2.6PACh. 28 - Prob. 28.2.7PACh. 28 - Prob. 28.2.8PACh. 28 - Prob. 28.2.10PACh. 28 - Prob. 28.2.12PACh. 28 - Prob. 28.3.1RQCh. 28 - Prob. 28.3.2RQCh. 28 - Prob. 28.3.4PACh. 28 - Prob. 28.3.5PACh. 28 - Prob. 28.3.6PACh. 28 - Prob. 28.3.7PACh. 28 - Prob. 28.3.8PACh. 28 - Prob. 28.4.1RQCh. 28 - Prob. 28.4.2RQCh. 28 - Prob. 28.4.3RQCh. 28 - Prob. 28.4.5PACh. 28 - Prob. 28.4.6PACh. 28 - Prob. 28.4.7PACh. 28 - Prob. 28.4.9PACh. 28 - Prob. 28.4.10PACh. 28 - Prob. 28.4.11PACh. 28 - Prob. 28.4.12PACh. 28 - Prob. 28.4.13PACh. 28 - Prob. 28.1RDECh. 28 - Prob. 28.2RDECh. 28 - Prob. 28.2CTE
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- 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.arrow_forwardWhat is the reason why fiscal policy should be in tune with monetary policy when the economy is in the recession phase? What is the importance of the Central Bank in the financial market?arrow_forwardA news headline reads, "Time for change: let free market forces determine the money supply." Which statement offers a valid claim in direct support of this headline? Congress affects the economy through fiscal policy; controlling the money supply is unnecessary. Congress should lose its role in fiscal policy; it often fails to influence the money supply. The Fed is just as important as Congress, as monetary policy works differently in the economy. The Fed should be controlled by Congress, and monetary policy should be publicly voted upon.arrow_forward
- What would Fed Chair Volker do if he was the chair of the Federal Reserve right now?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_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
- What was Ben Bernanke (Federal reserve current chairman) philosophy in regard to how to deal with the economy? How would his Fed be different than Alan Greenspan's the Federal Reserve chairman, 1987-2006?arrow_forwardBriefly explain the policy trilemma of the Central Banks. Give examples of how different countries have positioned themselves with respect to the trilemma.arrow_forwardBriefly discuss how the central bank plays the role of controller of credit in an economy?arrow_forward
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