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Chapter 16: Q.2 Critical Thinking Questions (page 365)

What do you think might be lost-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

It would be everyone's loss.

Step by step solution

01

introduction

At the point when a policy is to such an extent that individuals expect it by utilizing all suitable data, then, at that point, the arrangement becomes ineffectual assuming the policy becomes ineffectual or on the other hand on the off chance that the public authority's endeavour to decrease joblessness brings about additional expansion and an expansion in the business.

02

explanation

In the event that the Fed were to adhere to an effortlessly perceived guideline, it will be simple for individuals to expect the Fed's approach activity. Both judicious assumptions speculation and strategy immateriality recommendation let us know if an approach becomes expected then it consequently becomes incapable even in the short-run.

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Most popular questions from this chapter

Suppose that the economy currently is in long-run equilibrium. Explain the short- and long-run adjustments that will take place in an aggregate demand-aggregate supply diagram if the Fed expands the quantity of money in circulation.

Suppose that each 0.1percentage point increase in the equilibrium interest rate induces a \(5billion decrease in real planned investment spending by businesses. In addition, the investment multiplier is equal to 4, and the money multiplier is equal to 3. Furthermore, every \)9billion decrease in money supply brings about 0.1-percentage-point increase in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal.

a. How much must real planned investment decrease if the Federal Reserve desires to bring about an $80billion decrease in equilibrium real GDP ?

b. How much must the money supply change for the Fed to induce the change in real planned investment calculated in part (a)?

c. What dollar amount of open market operations must the Fed undertake to bring about the money supply change calculated in part (b) ?

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?

Describe how Federal Reserve monetary policy actions influence market interest rates

Take a look at the two panels of figure 16.2, and also consider figure 16-1. Suppose that instructions in the latest FOMC Directive call for a monetary policy action aimed at inducing individuals & businesses to demand a smaller quantity of money. Use appropriate panel of figure 16-2 to assist in explaining whether officials at the Federal Reserve Bank of New York's Trading desk should buy or sell bonds.
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