HW 11 ECON 380

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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


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