ECON 010 Lecture Notes - Lecture 26: Monetarism, Gdp Deflator, United States Treasury Security

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31 May 2018

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ECON010 Ch26:Monetary policy

Monetary policy: actions Fed take to manage money supply/IR

Federal funds rate: IR banks charge each other for overnight loans

Expansionary monetary policy: increasing money supply, decreasing IR to increase GDP

Contractionary monetary policy: adjusting money supply to increase IR to reduce

inflation

Taylor rule: links Fed’s target for federal funds rate to economic variables

Inflation targeting: conducting monetary policy to commit central bank to achieving

publicly announced level of inflation

Goals of Monetary Policy

1) price stability

2) high employment

3) stability of financial markets and institutions

4) economic growth

Money market graph

-interest rate=opportunity cost of holding money

-when IR on Treasury bills and other financial assets are low, the opportunity cost of

holding money is low so quantity of money demanded by households and firms will be high

Shifts in money demand curve

-increase in real GDP (buying/selling of goods/services increase)->MD increase

-increase in price level->increases MD (shift rt)

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Document Summary

Monetary policy: actions fed take to manage money supply/ir. Federal funds rate: ir banks charge each other for overnight loans. Expansionary monetary policy: increasing money supply, decreasing ir to increase gdp. Contractionary monetary policy: adjusting money supply to increase ir to reduce inflation. Taylor rule: links fed"s target for federal funds rate to economic variables. Inflation targeting: conducting monetary policy to commit central bank to achieving publicly announced level of inflation. Goals of monetary policy: price stability, high employment, stability of financial markets and institutions, economic growth. When ir on treasury bills and other financial assets are low, the opportunity cost of holding money is low so quantity of money demanded by households and firms will be high. Increase in real gdp (buying/selling of goods/services increase)->md increase. When fed increases money supply, short term ir must fall until it reaches a level at which households and firms are willing to hold the additional money.

Related Questions

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending.

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease

sapphirecrow883

The central bank of the country Oakville is hosting its annual economic policy symposium with monetary policy as the theme. Several bankers and professional economists are in attendance. Dorah Baker, a professor at the University of Oakville, is of the opinion that monetary policy should target the rate of growth of the money supply. This, she claims, would increase economic stability. Jack Snyder, a delegate attending the conference, does not agree. He thinks that monetary policy is highly effective in controlling inflation and so the central bank should continue to follow inflation-targeting. In fact, Jack also believes that the central bank should bring inflation down from the current level of four percent to as close to zero as possible.

Which of the following, if true, would suggest that monetary policy may not be very effective in substantially reducing inflation from the current level of four percent?

A. Oakville's central bank has maintained the interest rate at 0.25 percent for the last two years.

B. The highest level of inflation that Oakville has ever experienced is 5.5 percent.

C. Although the current level of inflation is considered to be high, the economy has also been growing at an impressive pace.

D. The marginal propensity to save in Oakville has traditionally been low.

E. Inflation in recent years has been driven by rising costs of production.

scarletspider222

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?

ECON 010 Lecture Notes - Lecture 26: Monetarism, Gdp Deflator, United States Treasury Security

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