CAS EC 102 Lecture Notes - Lecture 30: L30, Monetary Policy, Money Multiplier

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4/13 l30: open market operations (cont. , the impact of omos on interest rates, money supply, money demand, equilibrium in the money market, the behavior of interest rates. Monetary policy: expansionary monetary policy: actions which increase the money supply, contractionary monetary policy: actions which decrease the money supply. Total change in the money supply from an open market purchase by the fed: example: fed buys m in bonds. Buying bonds is expansionary monetary policy: example: fed sells m in bonds. Money supply = total deposits + cash held by the public. Tools of the fed: open market operations, the fed buys or sells t-bonds, changing the reserve requirement, reserve lending from the discount indow , role as lender of last resort , main policy tools: Target fed funds rate in recent years (cid:314) hat if fed sell bonds: steady increase until 2007 and then continuously decreases until 2009 when hit zero percent.

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Multiple Choice

1. Assume that the money multiplier equals 2.5 and if the Fed purchases $10 million in bonds from a bank, the monetary supply will:

Increase by $10 million.
Increase by $25 million.
Decrease by $10 million.
Decrease by $25 million.

2. The monetary base is defined as:

all currency in circulation.
checkable deposits at depository institutions.
excess reserves in the banking system.
currency plus total banking reserves.

3. Which of the following means of financing federal government spending will increase the monetary base?

raising the corporate income tax.
raising the personal income tax.
selling bonds to the public.
selling bonds to the Fed.

Short Answer

1. Assume the Federal Reserve Board is undertaking an expansionarymonetary policy. Explain the details of how the expansionary Fed impacts each of the following:

Open market operations - how does the Fed use open market operations for an expansionary monetary policy?
The monetary base.
Money Supply.
Fed funds interest rate.
Long-term interest rates.
Business Investment.
Aggregate demand.
Economic growth.
Unemployment rate.

2. Under certain circumstances, expansionary Fed policy may not have much of an effect on the rate of economic growth. Give a reason why, and explain?

3. Regarding the Asian currency crisis, answer the following questions:

Describe the normal reasons why a currency undergoes a significant depreciation and what were the important characteristics of the Asian countries involved in the crisis?
What are some expected domestic economic consequences of the currency crisis for the countries involved? Focus on:
- import prices of goods and services into the Asian country.
- export prices of goods and services from the Asian country.
- Domestic inflation rates.
Assume that the countries involved undertake a tight monetary policy and raise interest rates in response to the crisis. What are the two primary reasons for raising interest rates in their case?
Given high domestic interest rates, what is the economic outlook for these Asian countries in the next few years?

Assume that the banking system has total reserves of $100 million. Assume also that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. There is also no currency held by households.

a) What is the money multiplier? What is the money supply?

b) If the FED raises required reserves to 20 percent of deposits, what are the change in reserves and the change in money supply?

c) Now suppose the FED lowers the requirement from 10 percent to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

d) If the FED sells $1 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

e) If the FED buys $5 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

crimsonbadger400

Please answer all 3 thank you!!

The asset demand for money is

Question 43 options:

greater at low interest rates, because the opportunity cost of holding money is low.

greater at high interest rates as investors can earn more on their investments.

lower at low interest rates, because the opportunity cost of holding money is high.

greater at low interest rates, because the opportunity cost of holding money is high.

If the Fed sells U.S. government securities , the

Question 44 options:

money supply increases, and the money supply curve shifts to the left.

money supply decreases, and the money supply curve shifts to the left.

money supply decreases, and the money supply curve shifts to the right.

money supply increases, and the money supply curve shifts to the right.

The Federal Open Market Committee engages in contractionary monetary policy by

Question 45 options:

	creating excess reserves.
	buying bonds.
	selling bonds.
	lowering interest rates.

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CAS EC 102 Lecture Notes - Lecture 30: L30, Monetary Policy, Money Multiplier

CAS EC 102 Full Course Notes

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