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Chapter 16: Q9. (page 347)
True or False: A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.
The given statement is true.
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Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the effect of each of the following transactions on commercial bank reserves:
a. Federal Reserve Banks purchase securities from banks.
b. Commercial banks borrow from Federal Reserve Banks at the discount rate.
c. The Fed reduces the reserve ratio.
d. Commercial banks increase their reserves after the Fed increases the interest rate that it pays on reserves.
Assume that the following data characterize the hypothetical economy of Trance: money supply = \(200 billion; quantity of money demanded for transactions = \)150 billion; quantity of money demanded as an asset = \(10 billion at 12 percent interest, increasing by \)10 billion for each 2-percentage-point fall in the interest rate.
a. What is the equilibrium interest rate in Trance?
b. At the equilibrium interest rate, what are the quantity of money supplied, the quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance?
Suppose a bond with no expiration date has a face value of \(10,000 and annually pays \)800 in fixed interest. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the bond price at each of the interest yields shown. What generalization can you draw from the completed table?
Bond Price \( 8,000 | Interest Yield, % ________ |
______ | 8.9 |
\)10,000 $11,000 _______ | ________ ________ 6.2 |
Suppose that actual inflation is 3 percentage points, the Fed鈥檚 inflation target is 2 percentage points, and unemployment is 1 percent below the Fed鈥檚 unemployment target. According to the Taylor rule, what value will the Fed want to set for its targeted interest rate?
What are the components affected in a contractionary monetary policy?
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