EBK FOUNDATIONS OF ECONOMICS
8th Edition
ISBN: 9780134516196
Author: BADE
Publisher: PEARSON CO
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Chapter 33, Problem 9IAPA
To determine
To explain:
The effects of an open market sale of securities done by the Central bank and the change that can be seen in the interest rates as a result. Whether the central bank recommends an open market sale of securities and the reason for it.
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Question: What is the role of the federal funds rate in monetary policy, and how does the central bank use this rate to influence the economy? A) The federal funds rate has no impact on monetary policy. B) The federal funds rate is the interest rate at which banks lend reserves to each other overnight, and the central bank adjusts this rate to influence borrowing costs, spending, and overall economic activity. C) The federal funds rate is the interest rate at which banks lend to consumers, and it is controlled by the government. D) The federal funds rate determines government spending levels.
4*******************
4)Why did the Financial Crisis and the Great Recession cause the FED to alter its monetary policy from using open market operations to target the federal funds rate to establishing a corridor between the IOER and the discount rate through which the federal funds rate would move over time?
. Trace the impact of a sale of government bonds by the Central bank on bond prices, interest rates, investment, aggregate demand, real GDP, and the price level.
The text notes that a 10% increase in the money supply may not increase the price level by 10% in the short run. Explain why.
Suppose the Central bank were required to conduct monetary policy so as to hold the unemployment rate below 4%. What implications would this have for the economy?
Chapter 33 Solutions
EBK FOUNDATIONS OF ECONOMICS
Ch. 33 - Prob. 1SPPACh. 33 - Prob. 2SPPACh. 33 - Prob. 3SPPACh. 33 - Prob. 4SPPACh. 33 - Prob. 5SPPACh. 33 - Prob. 6SPPACh. 33 - Prob. 7SPPACh. 33 - Prob. 8SPPACh. 33 - Prob. 9SPPACh. 33 - Prob. 10SPPA
Ch. 33 - Prob. 11SPPACh. 33 - Prob. 1IAPACh. 33 - Prob. 2IAPACh. 33 - Prob. 3IAPACh. 33 - Prob. 4IAPACh. 33 - Prob. 5IAPACh. 33 - Prob. 6IAPACh. 33 - Prob. 7IAPACh. 33 - Prob. 8IAPACh. 33 - Prob. 9IAPACh. 33 - Prob. 10IAPACh. 33 - Prob. 11IAPACh. 33 - Prob. 12IAPACh. 33 - Prob. 1MCQCh. 33 - Prob. 2MCQCh. 33 - Prob. 3MCQCh. 33 - Prob. 4MCQCh. 33 - Prob. 5MCQCh. 33 - Prob. 6MCQCh. 33 - Prob. 7MCQ
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- Why does expansionary monetary policy causes interest rates to drop?arrow_forward1. Assume the Fed funds rate is initially on target. The demand for reserves by commercial banks increases by $million 2. Households receive allowances from the government account held at the Federal Reserve for $million 7. Which of the following statements is correct? If the Federal Reserve wants to keep the Fed funds rate on target, it must ________ through its the open market operations $million _____ .arrow_forwardHi, can someone help me with this question? Thank you in advance. 1. Suppose the Central Bank has just announced a higher overnight interest rate, thereby decreasing the desire for new loans. A commercial bank is holding excess reserves and wants to buy $46,000 of government bonds from the CB (which they are willing to sell). a. What is the immediate change in the Central Bank’s assets and liabilities? b. What is the immediate change in the commercial bank’s assets?arrow_forward
- A) Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets – reserves 30, bonds 50, and loans 50; Liabilities – deposits 300 and equity 30. B) All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3? C) Using your answer for C, answer the following: Suppose now that economists expect the velocity of money to increase by 50% as a result of the monetary stimulus. What will be the total increase in nominal GDP?arrow_forward1. Explain and demonstrate graphically that if the central bank pursues targeting a monetary aggregate, it is likely to lose control over the interest rate. Include correctly labeled diagrams in explaining your answers.arrow_forwardConsider the effects of events in the U.S. economy on the Canadian economy and on Canadian monetary policy. 1) If a economic boom begins in the United States, what is the likely effect on the Canadian aggregate demand? Explain. 2) If Canadian real GDP was equal to Y* (the potential GDP) before the U.S. boom began, what would be the likely response by the Bank of Canada to push Canadian GDP back to Y*? 3) Given the mobility of financial capital across international boundaries, what is the likely effect on Canadian aggregate demand from a policy by the U.S. Federal Reserve that raises U.S. interest rates? 4) Given your answer to part 3), explain why Canadian monetary policy might sometimes appear to “mirror” U.S. monetary policy even though the Bank of Canada is wholly independent from the U.S. Federal Reserve.arrow_forward
- Suppose Federal Reserve wants to reduce money supply. How could Federal Reserve reduce money supply through the open market operations? Show your answers in a diagram. Your diagram should also show interbank loans. To reduce money supply, should Fed increase or decrease Fed funds rate? For the Fed Funds rate, who is a borrower? Who is a lender? For the discount rate, who is a borrower? Who is the lender?arrow_forward5 Outline the main monetary policy tools that a central bank can use to control money supply. To what extent have they been effective in recent years? What is liquidity trap?arrow_forwardDiscuss how the money supply is increased through the process of the Fed purchasing bonds in the open market. What is the signficance of doing so?arrow_forward
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