Macroeconomics

David Colander

Chapter 14 Monetary Policy - all with Video Answers

Educators

Chapter Questions

Problem 1

Say that investment increases by 20 for each interest rate drop of 1 percent. Say also that the expenditures multiplier is 3 . If the money multiplier is 4 , and each 5 unit change in the money supply changes the interest rate by 1 percent, what open market policy would you recommend to increase income by 240? $\mathrm{LO1}, \mathrm{LO} 4$

Crystal Wang

Numerade Educator

00:47

Problem 2

Demonstrate the effect of contractionary monetary policy in the AS/AD model. LO1

Kaylee Mcclellan

Numerade Educator

Problem 3

Demonstrate the effect of expansionary monetary policy in the money and loanable funds markets. LO1

Check back soon!

00:47

Problem 4

Demonstrate the effect of expansionary monetary policy in the AS/AD model when the economy is
a. Below potential output.
b. Significantly above potential output. LO1

Kaylee Mcclellan

Numerade Educator

01:52

Problem 5

Is the Fed a private or a public agency? $\mathrm{LO} 2$

Pragya Ahuja

Numerade Educator

02:19

Problem 6

Why are there few regional Fed banks in the western part of the United States? LO2

Pragya Ahuja

Numerade Educator

01:10

Problem 7

What are the six explicit functions of the Fed? LO2

Tristan Wille

Numerade Educator

02:47

Problem 8

How does the Fed use open market operations to increase the money supply? LO3

David Gagnon

Numerade Educator

01:07

Problem 9

Write the formula for the money multiplier. If the Fed eliminated the reserve requirement, what would happen to the money multiplier and the supply of money? LO3

Kaylee Mcclellan

Numerade Educator

00:56

Problem 10

If a bank is unable to borrow reserves from the Fed funds market to meet its reserve requirement, where else might it borrow reserves? What is the name of the rate it pays to borrow these reserves? LO3

Kaylee Mcclellan

Numerade Educator

04:51

Problem 11

What happens to interest rates and the price of bonds when the Fed buys bonds? LO3

Jennifer Stoner

Numerade Educator

00:56

Problem 12

If the Federal Reserve announces a change in the direction of monetary policy, is it describing an offensive or defensive action? Explain your answer. LO3

Kaylee Mcclellan

Numerade Educator

Problem 13

Why would a bank hold Treasury bills as secondary reserves when it could simply hold primary reserves cash? LO3

Check back soon!

07:12

Problem 14

The Fed wants to increase the money supply (which is currently 4,000 ) by 200 . The money multiplier is 3 and people hold no cash. For each 1 percentage point the discount rate falls, banks borrow an additional 20. Explain how the Fed can achieve its goals using the following tools:
a. Change the reserve requirement.
b. Change the discount rate.
c. Use open market operations. LO3

Crystal Wang

Numerade Educator

02:46

Problem 15

Suppose the Fed decides it needs to pursue an expansionary policy. Assume people hold no cash, the reserve requirement is 20 percent, and there are no excess reserves. Show how the Fed would increase the money supply by $$\$ 2$$ million through open market operations. LO3

Yi Chun Lin

Washington University in St Louis

02:46

Problem 16

Suppose the Fed decides that it needs to pursue a contractionary policy. It wants to decrease the money supply by $$\$ 2$$ million. Assume people hold 20 percent of their money in the form of cash balances, the reserve requirement is 20 percent, and there are no excess reserves. Show how the Fed would decrease the money supply by $$\$ 2$$ million through open market operations. LO3

Yi Chun Lin

Washington University in St Louis

04:05

Problem 17

Some individuals have suggested raising the required reserve ratio for banks to 100 percent.
a. What would the money multiplier be if this change were made?
b. What effect would such a change have on the money supply?
c. How could that effect be offset? LO3

Jennifer Stoner

Numerade Educator

01:38

Problem 18

Congratulations! You have been approved adviser to the Federal Reserve Bank.
a. The Federal Open Market Committee decides that it must increase the money supply by 60 . Committee members tell you the reserve ratio is 0.1 and the cashto-deposit ratio is 0.3 . They ask you what directive they should give to the open market desk. You tell them, being as specific as possible, using the money multiplier.
b. They ask you for two other ways they could have achieved the same end. You tell them.
c. Based on the AS/AD model, tell them what you think the effect on the price level of your policy will be. LO3

Majid Borumand

Numerade Educator

01:27

Problem 19

What is meant by the Federal funds rate? LO4

Tristan Wille

Numerade Educator

01:08

Problem 20

Why is the Fed funds rate the interest rate that the Fed most directly controls? LO4

Kaylee Mcclellan

Numerade Educator

Problem 21

What is the relationship between tools, operating targets, intermediate targets, and ultimate targets? LO4

Check back soon!

01:01

Problem 22

What are examples of tools, operating targets, and ultimate targets? LO4

Pankaj Jain

Numerade Educator

Problem 23

The "Check 21 " Act, which allows banks to transfer check images instead of paper checks, speeds up check processing. What is the likely effect on:
a. Float (duplicate money because a check has been deposited but not yet deducted from the payer's account).
b. Variability of float.
c. Defensive Fed actions. LO4

Check back soon!