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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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.
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While a television news reporter might state that “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent,” a more precise account of the Fed’s action would be as follows:
“Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would 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 took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent.”
Respond to the following in a minimum of 175 words:
Explain the chain of events that occurs for expansionary and contractionary monetary policy to affect the long-run equilibrium level of real gross domestic product (GDP).
Compare and contrast expansionary and contractionary fiscal policy.
Chapter 29 Solutions
Principles of Economics (12th Edition)
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- Do you think the typical time lag for fiscal policy is likely to be longer or shorter than the time lag for monetary policy? Explain your answer?arrow_forwardOn the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this lack of intervention. Suppose the Fed wants to keep 2014 interest rates at their 2013 level. On the previous graph, place the green line (triangle symbols) to indicate the new money supply curve if the Fed follows this policy. Then use the black point (plus symbol) to indicate the equilibrium interest rate and quantity of money in this case. Because , most central banks set monetary policy aimed at targeting a specific .arrow_forwardSuppose our federal government finally decided to reduce the debt by increasing taxes. Fearful that this would bring down aggregate demand to much, the Federal Reserve might respond by. reducing the discount rate and increasing the money banks land Increasing the discount rate and decreasing the money banks lend. increasing the discount rate and increasing the money banks lead. reducing the discount rate and decreasing the money banks lendarrow_forward
- Which of the following statements is false? It might sometimes make sense for a government to combine an expansionary monetary policy with an expansionary fiscal policy. If spending is very responsive to changes in interest rates, and the demand for money is interest inelastic, then monetary policy tends to be more powerful than fiscal policy. It would never make sense for a government to combine an expansionary monetary policy with a contractionary fiscal policy. If spending is not very responsive to changes in interest rates, and the demand for money is interest elastic, then fiscal policy tends to be more powerful than monetary policyarrow_forwardSuppose a liquidity trap situation exists. Which of the following is most likely to occur if taxes are cut? A) no change in output and no change in the interest rate B) an increase in output and an increase in the interest rate C) an increase in output and little change in the interest rate D) an increase in output and a reduction in the interest rate E) none of the abovearrow_forwardWhich statement best describes the Federal Reserve's current level of transparency to the American public? The actions of the Fed are largely carried out in secrecy with little regard to public transparency. The Fed is somewhat transparent with regard to some aspects of monetary policy, but does not disclose details regarding macroeconomic conditions and goals. The Fed is extremely transparent with regard to monetary policy and discloses goals, targets, and predictions for the macroeconomy. The Fed only reports to the American public during periods of economic slow down.arrow_forward
- According to liquidity preference theory, if the price level increases, then the equilibrium interest rate rises and the aggregate quantity of goods demanded rises. rises and the aggregate quantity of goods demanded falls. falls and the aggregate quantity of goods demanded rises. falls and the aggregate quantity of goods demanded falls.arrow_forwardUsing 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_forwardExplain how each of the following helps to stabilize the financial system: deposit insurance, capital requirementsarrow_forward
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