EBK FOUNDATIONS OF ECONOMICS
8th Edition
ISBN: 8220103632225
Author: PARKIN
Publisher: PEARSON
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Question
Chapter 28, Problem 5IAPA
To determine
To explain:
The effects of the Feds conducting an open market sale of securities in the short run on the nominal interest rate, and in the long run on the value of money and the price level.
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When the Fed targets the amount of money in the economy, interest rates
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An individual deposits $2,000 in cash into her checking account. Calculate each of the following:
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Using a correctly labeled graph of the money market, show the effect of the Federal Reserve selling bonds on the nominal interest rate.
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Chapter 28 Solutions
EBK FOUNDATIONS OF ECONOMICS
Ch. 28 - Prob. 1SPPACh. 28 - Prob. 2SPPACh. 28 - Prob. 3SPPACh. 28 - Prob. 4SPPACh. 28 - Prob. 5SPPACh. 28 - Prob. 6SPPACh. 28 - Prob. 7SPPACh. 28 - Prob. 8SPPACh. 28 - Prob. 9SPPACh. 28 - Prob. 10SPPA
Ch. 28 - Prob. 11SPPACh. 28 - Prob. 1IAPACh. 28 - Prob. 2IAPACh. 28 - Prob. 3IAPACh. 28 - Prob. 4IAPACh. 28 - Prob. 5IAPACh. 28 - Prob. 6IAPACh. 28 - Prob. 7IAPACh. 28 - Prob. 8IAPACh. 28 - Prob. 9IAPACh. 28 - Prob. 10IAPACh. 28 - Prob. 11IAPACh. 28 - Prob. 12IAPACh. 28 - Prob. 1MCQCh. 28 - Prob. 2MCQCh. 28 - Prob. 3MCQCh. 28 - Prob. 4MCQCh. 28 - Prob. 5MCQCh. 28 - Prob. 6MCQCh. 28 - Prob. 7MCQCh. 28 - Prob. 8MCQ
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- 3. Changes in the money supply The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 3.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. 5.5 5.0 New MS Curve Money Demand 4.5 4.0 New Equilibrium 3.5 3.0 2.5 2.0 Money Supply 1.5 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 MONEY (Trillions of dollars) Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage point. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point…arrow_forwardThe Fed increases the discount rate. As a result, ceteris paribus, the equilibrium interest rate will: a) not change b) decrease c) be ambiguous d) increasearrow_forwardThe FED has recently decided to reverse the massive buildup of its holding of Treasury and mortgage bonds. Thus, they began to sell these Treasury securities in the financial markets to remove liquidity from them and reduce the supply of money and credit in the economy. This will create a shortage in the money market.arrow_forward
- When the Federal Reserve buys bonds, it effectively lowers the nominal interest rate in the market. true falsearrow_forwardThe Fed conducts open-market sales, which of the following three increases: interest rates, prices, investment soendingarrow_forwardAn increase in the general price level means goods will now cost more. What effect with this have on money demand and the interest rate? inflation erodes the value of money, money demand falls as does the interest rate money demand rises, driving up interest rates money demand rises driving down interest rates money demand rises, forcing the central bank to increase the money supply, interest rates thus remain constant.arrow_forward
- The demand for money is given by Md = $Y (0.3 - i), where $Y = 100 and the supply of money is $20. What is the equilibrium interest rate? What is the impact on the interest rate if central bank money is increased to $25?arrow_forwardExplain how a sustained increase in the growth rate of the money supply (gM↑) at a particular time (t*) can lead first to the liquidity effect, then to the nominal income effect, and finally to the inflation expectations effect. Also, explain how the interest rate changes in response to each of these effects.arrow_forwardThe Federal Reserve helps determine interest rates for the entire economy. Answer the following questions below. How does the Fed stimulate the economy? How does the Fed affect interest rates? Does the Fed have complete control over U.S. interest rates? That is, can it set rates at any level it chooses? Why or why not? Do you think that the Fed should control interest rates or let the free market set the rates? What are the pros and cons of having the Fed or free-market determine interest rates?arrow_forward
- If the money supply increases, and the price level is unchanged, interest rates will fall. True or falsearrow_forwardWhat happens to the money supply when the Fed buys government bonds? According to the theory of liquidity preference, what is the impact of the Fed action on the equilibrium interest rate?arrow_forwardThe demand for money is given by Md = $Y (0.3-i), where $Y = 120 and the supply of money is $30. What is the equilibrium interest rate? If the central bank wants to decrease i by 2%, at what level should it set the supply of money?arrow_forward
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