ECON 101 Lecture Notes - Lecture 13: Federal Funds Rate, Open Market Operation, Nominal Interest Rate

33 views2 pages

crimsonmacaw448

26 Apr 2017

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Influence of monetary and fiscal policy on aggregate demand. Ms (cid:272)ur(cid:448)e is (cid:448)erti(cid:272)al, (cid:272)hanges in r doesn"t affe(cid:272)t ms, (cid:449)hi(cid:272)h is fi(cid:454)ed (cid:271)(cid:455) fed. Md curve downward \: fall in r increases money demand. Fall in p reduces money demand, lowers r. Decrease in r, increase in i and quantity of g/s demanded. To reduce money supply: raise r by reducing money supply, also quantity of g/s demanded. Federal funds rate: banks charge each other on short-term loans. Macroeconomic goals achieved by fed using monetary policy to shift the ad curve. To change interest rate and shift the ad curve, fed conducts open market operations to change ms. Money supply: assume fixed by central bank, does not depend on interest rate. Liquidity trap: when the interest rate is zero. Monetary policy stimulates ad by reducing interest rate. Monetary policy might not work, since nominal interest rate cannot be reduced further.

Related Questions

Consider the scenario in which the Fed is implementing a contractionary monetary policy aimed at alleviating inflationary pressures.In this regard please provide an answer to the questions listed below. In order to answer, it might be a good idea to use a money market diagram and show how interest rates affect the economy using the AD/AS diagram. No need to submit the graphs, but once again drawing the two graphs (money market and AD/AS) for yourself will go a long way in guiding you towards the right answer. Note. In the static AD/AS model, initially assume that the economy is in SR equilibrium and real GDP is above potential GDP. a) As a result of the contractionary monetary policy pursued by the Fed, what would happen with the interest rate? The interest rate is going to (rise/fall/stay fixed) Blank 1 . b) What would happen with the short run aggregate supply curve? Short run aggregate supply curve will shift (left/right/stay fixed) Blank 2 . c) What would happen with the long run aggregate supply curve? Long run aggregate supply curve will shift (left/right/stay fixed) Blank 3 . d) What would happen with the aggregate demand curve? Aggregate demand curve will shift (left/right/stay fixed) Blank 4 . e) What would happen with the Real GDP level? Real GDP will (rise/fall/stay fixed) Blank 5 . f) What would happen with the employment level? Unmployment level will (rise/fall/stay fixed) Blank 6 .

silverwildebeest561

Question 16 (3 points) An expansionary monetary policy by the Fed should lead to:

A decrease in investment and a decrease in aggregate demand. Leave investment unchanged but decrease aggregate demand.

An increase in investment and an increase in aggregate demand.

An increase in investment and a decrease in aggregate demand.

Question 17 (3 points) Federal Reserve policy may have little impact on aggregate demand if:

Exchange rates do not respond to a change in market interest rates.

Investment by firms fails to respond to lower interest rates.

Banks meet their reserve requirements.

People fail to spend the extra money they receive when the Fed cuts taxes.

Question 18 (3 points) A liquidity trap is said to exist when a change in monetary policy has no effect on:

The supply of government bonds.

The natural level of employment

Aggregate supply.

Interest rates.

Question 19 (3 points) Because of the problem of lags, monetary authorities should probably respond to conditions:

Expected to exist in the future.

Immediately as they arise.

In the recent past.

Based on past statistics.

amberbeaver601

Question 1. (0.1 pt) According to the wealth effect, a higher price level will (decrease, increase)

the number of goods and services demanded. (Circle the correct answer for each.)

Question 2. (0.2 pt) If the central bank wants to expand aggregate demand, it can (decrease, increase)

the money supply, which would (decrease, increase) the interest rate.

(Circle the correct answer for each.)

Question 3. (0.2 pt) Monetary policy that contracts the money supply, will (decrease, increase) the

interest rate causing the aggregate demand curve to shift (in, out).

(Circle the correct answer for each.)

Question 4. (0.7 pt) The Federal Reserve contracts the money supply by 5 percent.

(Make sure to label your axes.)

a. ) Use the supply of money and the demand for money diagram to illustrate the impact of this policy on the interest rate.

b. ) Use the model of aggregate demand and aggregate supply to illustrate the impact of this change in the interest rate on output and the price level in the short run.

Question 5 . (0.8 pt) Explain how each of the following developments would affect the supply of money,

the demand for money, and the interest rate. Illustrate your answers with diagrams.

(Make sure to label your axes.)

a. ) The Fed's bond traders sell bonds in open-market operations.

b. ) An increase in credit-card availability reduces the cash people hold.

c. ) The Federal Reserve reduces banks' reserve requirements.

d. ) Households decide to hold more money to use for holiday shopping.

apricotantelope345

ECON 101 Lecture Notes - Lecture 13: Federal Funds Rate, Open Market Operation, Nominal Interest Rate

Document Summary

Get access

Related Documents

ECON 101 Lecture Notes - Lecture 15: Economic And Monetary Union Of The European Union, Foreign Exchange Market, European Central Bank

ECON 101 Lecture 19: Econ Week 11

ECON 101 Lecture Notes - Lecture 3: Comparative Advantage, Federal Open Market Committee, Inferior Good

Related Questions