Explain the effect on the monetary base of actions by fed

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Reference no: EM133202158

Assignment:

Questions:

1. Show the effects (the changes) on the balance sheets for the Fed and the commercial banks of a $100 open market purchase of securities after the completion of the money multiplier process. Assume that the required reserve ratio is .1, the excess reserve ratio is .1 and the currency to deposit ratio is .3.

Fed

Assets Liabilities

Securities Currency in Circulation

Loans to Banks Member Bank Reserves

Banks

Assets Liabilities

Reserves Deposits

Securities Loans from Fed

Loans to businesses Capital

2. Explain the effect on the monetary base of the following actions by the Fed.

a. The Fed builds a new annex to its headquarters in Washington

b. Foreign central banks increase their account holdings at the Fed.

3. Draw a supply-demand diagram for the market for reserves to answer each of the following questions.

a. Draw a graph showing an increase in the discount rate which increases the federal funds rate.

b. Show the effect of an increase in currency holding by the public on the federal funds rate.

c. Draw a graph showing the effect of a one percent increase in the interest rate on excess reserves which increases the federal funds rate by one-half percent

d. Show the effect of a decrease in the reserve requirement by the Federal Reserve

4. Estimate what the current federal funds rate would be using the Taylor rule. Assume that the inflation rate is 7%, the target inflation rate is 2%, the equilibrium real interest rate is 0.5%, potential GDP is $20,000 and actual GDP is $20,500

5. a. Which nonconventional policy tool attempts to lower long-term interest rates by affecting expectations of short-term interest rates?

b. Which nonconventional monetary policy tool causes large changes in the monetary base?

Reference no: EM133202158

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