How does a stimulus program (through the money multiplier) affect the money supply?

Currently, what indicators are evident that there is too much or too little money within the economy? How is monetary policy aiming to adjust this?

What are some major differences between the Federal Reserve System and the monetary system in the officials' home country (China)?

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Sixta KovacekLv2

8 May 2018

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Related questions

What are the factors that would influence the Federal Reserve in adjusting the discount rate?

How does the discount rate affect the decisions of banks in setting their specific interest rates?

How does monetary policy aim to avoid inflation?

How does monetary policy control the money supply?

How does a stimulus program (through the money multiplier) affect the money supply?

Currently, what indicators are evident that there is too much or too little money within the economy? How is monetary policy aiming to adjust this?

What are some major differences between the Federal Reserve System and the monetary system in the officials' home country (China)?

2/. Assume that you are the manager of a firm. You are concerned about a potential increase in interest rates because it would reduce the demand for your products. Currently, economic growth is high, but annual inflation has increased from 3 percent to 5 percent within the last six months. The unemployment rate is very low and cannot go higher. The Federal Reserve (Fed) is meeting next week to assess economic conditions and set monetary policy.

A. Given the current economic situation, should the Fed adjust or not adjust economic policy? If so, how? If not, why?

B. Recently, the Fed has allowed the money supply to expand beyond its long-term target range. Does this affect your expectation of what the Fed will decide at its upcoming meeting?

C. Suppose the Fed has just learned that the Treasury will need to borrow a larger amount of funds than originally expected. Explain how this information may affect the degree to which the Fed changes the monetary policy.

chocolatewildebeest735

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?