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Chapter 16: Q.2 For Critical Thinking (page 366)

If the FOMC were to aim to attain targets for M1 or M2 instead of the federal funds rate, would people be as concerned with trying to anticipate future federal funds rate changes? Explain.

Short Answer

Expert verified

If the FOMC were to aim to attain targets for M1 or M2 instead of the federal funds rate, the federal funds rate will hold its position.

Step by step solution

01

introduction 

At the point when a strategy is to such an extent that individuals expect it by utilizing all suitable data, then, at that point, the approach becomes ineffectual. Monetary specialists utilize all suitable data as a base to shape their assumptions.

02

explanation part (a)

The soul of the objective assumptions theory is that individuals structure assumptions and attempt to frame them amazing precisely. Individuals structure assumptions regarding various things and, for this, they utilize all suitable data.

03

explanation part (b)

Government finances rates are something individuals are worried about, in light of the fact that they utilize this data for their future activities according to their expectations. This is the rate at which the Fed loans to banks and hence it remembers data-based assumptions regarding the loaning circumstance for the country.

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Most popular questions from this chapter

To implement a credit policy intended to expand the liquidity of the banking system, the Fed desires to increase its assets by lending to a substantial number of banks. How might the Fed adjust the interest rate that it pays banks on reserves in order to induce them to hold the reserves required for funding this credit policy action? What will happen to the Fed's liabilities if it implements this policy action?

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

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.

Consider figure 16-7. Discuss a specific monetary policy action that Fed's Trading Desk could implement in order to induce the effects traced out by this figure.

Consider the data in Problem 16-10. Suppose that the money supply increases by $ 100 billion and real GDP and the income velocity remain unchanged.

a. According to the quantity theory of money and prices, what is the new equilibrium price level after full adjustment to the increase in the money supply?

b. What is the percentage increase in the money supply?

c. What is the percentage change in the price level?

d. How do the percentage changes in the money supply and price level compare?
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