HW 11 ECON 380
What are the reasons banks demand reserves? (Check all that apply.)
To meet their legal obligation to hold required reserves. To hold excess reserves to meet their short-term liquidity needs.
Suppose the fed decides to increase the required reserve ratio, but does not want the increase to affect its target for the federal funds rate. Show how the fed can use open market operations to accomplish this policy.
To offset the effect of an increase in the required reserve ratio, which would increase the demand for reserves, the fed could [BUY] securities.
Why does a decrease in the federal funds rate increase the quantity of reserves demanded? As the federal funds rate decreases, the opportunity cost to banks of holding excess reserves [BLANK] because the return they could earn from lending out those reserves [BLANK].
decreases goes down
Place the following in sequence, from what the Fed has the most influence on to what the Fed has the least influence on: policy goals, policy tools, policy instruments, intermediate targets. From the most influence to the least influence: policy tools policy goals policy instruments intermediate targets
1. policy tools 2. policy instruments 3. intermediate targets 4. policy goals
Using the Taylor rule, calculate the target for the federal funds rate for July 2010 using the following information: Equilibrium real federal funds rate 3% Target inflation rate 2% Current inflation rate 0.8% Output gap −8% The target for the federal funds rate for July 2010 is [BLANK]% In your calculations, the inflation gap is negative if the current inflation rate is below the target inflation rate. How does the targeted federal funds rate calculated using the Taylor rule compare to the actual federal funds rate of 0% to 0.25%?
3 + 0.8 + (0.5)(0.8-2) + (0.5)(8) = -0.8 This Taylor rule federal funds rate target is lower than the Fed's actual target range.
Would deflation create some of the same problems as inflation in terms of the information communicated by price changes and the arbitrary redistribution of income? (Check all that apply.)
A. Deflation, just like inflation, complicates the ability to distinguish overall price changes from relative price changes, which determine resource allocation. Your answer is correct. B. Unanticipated deflation redistributes income just as unanticipated inflation does, but from borrowers to lenders rather than from lenders to borrowers.
How does an open market sale of Treasury securities by the Fed affect the price of Treasury securities, the yield on Treasury securities, the monetary base, and the money supply?
An open market sale of Treasury securities [DECREASES] the price of Treasury securities, thereby [INCREASING] the yield on Treasury securities. The sale of Treasury securities [DECREASES] the monetary base and [DECREASES] the money supply.
At what interest rate does the demand curve for reserves become perfectly elastic?
At the interest rate the Fed pays on banks' reserve balances
Which from the following variables is most likely to be an operating target of monetary policy? (Check all that apply). Federal funds rate M1 M2 Open market purchases Unemployment rate Real GDP growth Discount rate Monetary base Non-borrowed reserves
Federal Funds Rate Non-borrowed Reserves
Which from the following variables is most likely to be an intermediate target of monetary policy? (Check all that apply.) Federal funds rate M1 M2 Open market purchases Unemployment rate Real GDP growth Discount rate Monetary base Non-borrowed reserves
Monetary Base M1 M2
Which from the following variables is most likely to be a monetary policy tool? (Check all that apply). Federal funds rate M1 M2 Open market purchases Unemployment rate Real GDP growth Discount rate Monetary base Non-borrowed reserves
Open Market Purchases Discount Rate
How can the FOMC use open market operations to raise its target for the federal funds rate? To raise its target for the federal funds rate, the Fed can conduct an open market [BLANK] of securities.
Sale
"Warren Buffet, who in 1999 and early 2000 was widely derided as 'a dinosaur' and 'out of touch' for his refusal to buy technology stocks." Why would anyone refer to an investor as out of touch if he wasn't investing in technology stocks in 1999 and early 2000? Given the subsequent crash of technology stocks, why might the Fed have not intervened during this period of time?
Technology stocks were rising with the dot-com boom. It was difficult to determine whether an asset bubble existed.
Which from the following variables is most likely to be a goal of monetary policy? (Check all that apply.) Federal funds rate M1 M2 Open market purchases Unemployment rate Real GDP growth Discount rate Monetary base Nonborrowed reserves
Unemployment Rate Real GDP growth
If the Fed uses the federal funds rate as a policy instrument, then decreases in the demand for reserves will lead to [BLANK] in the level of reserves.
a decrease
If the Fed uses the level of reserves as a policy instrument, then increases in the demand for reserves will lead to [BLANK] in the federal funds rate]
an increase
