Question 1

Suppose that the Fed has currently set the reserve requirement at 10%.Further suppose that banks do not hold any excess reserves.
(a) How much money can the banking system support if it currently has $1,000,000 in reserves?
(b) If the Fed wanted to cause the money supply to expand, how could it use the reserve requirement to achieve its goal? Give an example.

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Question 2

Explain how distinction between the real and nominal interest rate poses problems for the conduct of monetary policy.

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Question 3

Explain the difference between real and nominal interest rates.How are they related?

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Question 4

Suppose banks hold no excess reserves, the reserve requirement is 20%.
(a) If banks have $10 million in reserves what will the money supply be?
(b) How will your answer to (a) change if the Fed increases the reserve requirement to 30%?

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Question 5

Explain how the Fed influences the Federal Funds rate.

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Question 6

Imagine you are a Federal Reserve board governor and you are examining the economy.You discover that the money supply is currently $2,000,000, that banks have $1,000,000 in reserves.You want to increase the money supply by $500,000 using an open market operation.What would you do?

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Question 7

Using the following AS/AD diagram, answer the question below.  If the economy is currently at point A, does the Fed have enough information to decide whether it should conduct expansionary or contractionary monetary policy? Explain your answer.

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Question 8

What ultimately limits the amount of expansionary pressure the Fed can create? Has the Fed ever found itself up against this limit?

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Question 9

Explain the difference between the Fed's offensive and defensive actions as parts of its control over monetary policy.Give an example of each type of action.

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Question 10

If inflation exceeds target inflation by 3%, target inflation is at 2%, and total output is 1% above its potential, what is the Federal Funds rate that the Fed will set according to the Taylor rule?

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Question 11

What are the Fed's ultimate targets? Explain how the Fed achieves ultimate economic targets using its available tools.

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Question 12

What are Federal funds? What is the Federal funds rate? Explain how the Fed uses the Federal funds rate as a target.

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Question 13

(a) Show the effects of expansionary and contractionary open market operations on the interest rate using demand and supply curves and the market for government bonds.
(b) What should the Fed do if the interest rate is below its target rate? What should the Fed do if the interest rate is above its target rate?

Accepted Answer

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Question 14

Suppose banks have $25 million in reserves, the reserve requirement is 5%, and people do not hold any cash outside of banks.If the Fed makes an open market sale of $1 million of government securities, by how much will the money supply change? (Assume that the public does not hold any of its money in the form of currency.)

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Question 15

Demonstrate graphically and explain verbally that the impact of expansionary monetary policy on the economy depends upon the position of equilibrium output in relation to potential output.

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Question 16

Demonstrate graphically and explain verbally (using the AS/AD model) the effect of the Fed's sale of government bonds when the economy is below potential.

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Question 17

Explain the difference between expansionary and contractionary monetary policy.

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Quiz 11: Monetary Policy