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Chapter 16: Q.16.2 Learning Objectives (page 349)

Describe how Federal Reserve monetary policy actions influence market interest rates

Short Answer

Expert verified

Federal Reserve monetary policy actions influence market interest rates by setting discount rates, opening market operations, and setting reserve requirements.

Step by step solution

01

introduction

The monetary policy implies the moves made by the Federal Reserve in regards to value dependability, work and moderate long haul loan fees.

02

explanation

1. Setting reserve requirements implies indicating how many actual assets that banks should hold for possible later use against their store record and it additionally decides the most extreme sum that the banks can raise through advances and speculations.

2. Open market operations allude to trading the US government protections in the monetary market to impact the degree of stores in the financial framework. The degree of stores will impact the loan fees.

3. Setting the discount rate and financing cost are paid by the bank on momentary advances from Federal Reserve Bank. These rates are typically lower than the government finances rate.

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Most popular questions from this chapter

Explain how the Federal Reserve has implemented a credit policy since 2008.

You learned in an earlier chapter that if a recessionary gap occurs in the short run, then in the long run a new equilibrium arises when input prices and expectations adjust downward, causing the short-run aggregate supply curve to shift downward and to the right and pushing equilibrium real GDP per year back to its long-run value. In this chapter, you learned that the Federal Reserve can eliminate a recessionary gap in the short run by undertaking a policy action that increases aggregate demand.

a. Propose one monetary policy action that could eliminate the recessionary gap in the short run.

b. In what way might society gain if the Fed implements the policy you have proposed instead of simply permitting long-run adjustments to take place?

Why do you think that many people pay so much attention to likely future movements in the federal funds rate?

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 3.

c. The planned investment schedule is such that at a 6percent rate of interest, the investment is \(1200billion; at 5 percent, investment is \)1225billion

d. The investment multiplier is 3.

e. The initial equilibrium level of real GDP is \(18trillion.

f. The equilibrium rate of interest is 6percent.

Now the Fed engages in expansionary monetary policy. It buys \)1billion worth of bonds, which increases the money supply, which in turn lowers the market rate of interest by 1percentage point. Determine how much money supply must have increased, and then trace out the numerical consequences of the associated reduction in interest rates on all the other variables mentioned.

Suppose that to finance its credit policy, the Fed pays an annual interest rate of 0.50 per cent on bank reserves. During the course of the current year, banks hold $1 trillion in reserves. What is the total amount of interest the Fed pays banks during the year?
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