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Chapter 16: Q.1 Critical Thinking Questions (page 365)

What do you suppose might be gained-and by whom-if the Fed were to follow an easily understood rule as a guide for conducting monetary policy? Explain.

Short Answer

Expert verified

if the Fed were to follow an easily understood rule as a guide for conducting monetary policy then it would-be no one's benefit assuming that the strategy becomes inadequate or on the other hand assuming the public authority's endeavour to diminish joblessness brings about additional expansion and an expansion in the business.

Step by step solution

01

introduction

Whenever a policy is to such an extent that individuals expect it by utilizing all suitable data, then, at that point, the arrangement becomes incapable.

02

explanation

On the off chance that the Fed were to observe an effectively perceived guideline, it will be simple for individuals to expect the Fed's approach activity. Both objective assumptions speculation and strategy unimportance recommendation let us that know if a policy becomes expected then it consequently becomes insufficient even in the short-run.

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Most popular questions from this chapter

Why do you suppose that corporate cash holdings have decreased slightly since 2015?

Evaluate how expansionary and contractionary monetary policy actions affect equilibrium real GDP and the price level in the short run.

Assume that the following conditions exist :

a. All banks are fully loaned up - there are no excess reserves, and desired excess reserves are always zero.

b. The money multiplier is 4.

c. The planned investment schedule is such that at a 4percent rate of interest, investment is \(1400billion. At 5percent, investment is \)1380billion.

d. The investment multiplier is 5.

e. The initial equilibrium level of real GDP is \(19trillion.

f. The equilibrium rate of interest is 4percent.

Now the Fed engages in contractionary monetary policy. It sells \)2billion worth of bonds, which reduces the money supply, which in turn raises the market rate of interest by 1 percentage point. Determine how much the money supply must have decreased, and then trace out numerical consequences of the associated increase in interest rates on all other variables mentioned.

Consider figure 16.3, Discuss a policy action that trading desk at the federal reserve bank of New York could undertake in order to generate the decrease in aggregate demand displayed in this figure

On the basis of Problem 16-1, imagine that initially the market interest rate is 5 per cent and at this interest rate you have decided to hold half of your financial wealth like bonds and half as holdings of non-interest-bearing money. You notice that the market interest rate is starting to rise, however, and you become convinced that it will ultimately rise to 10 per cent.

a. In what direction do you expect the value of your bond holdings to go when the interest rate rises?

b. If you wish to prevent the value of your financial wealth from declining in the future, how should you adjust the way you split your wealth between bonds and money? What does this imply about the demand for money?
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