Reference no: EM132415534

Question 1: The Federal Reserve can increase the money supply by buying government securities from the non-bank public in the secondary market. Use supply and demand analysis for government securities to discuss the impact of the above action on the interest rate.

Question 2: Suppose the Federal Reserve conducts an open market purchase of $150 million government securities from the non-bank public.

(a) Given the required reserve ratio, RR/D = 0.10, the excess reserves to deposits ratio, ER/D = 0.06, the currency to deposits ratio, C/D = 0.04, the nontransaction deposits to deposits ratio, N/D = 0.03, and the money market mutual funds to deposits ratio, MMF/D = 0.03, what will be the change in money supply?

(b) If the commercial banks keep more excess reserves in the banking system, how does it affect the money multiplier?

Question 3: Given the existing federal funds rate ffr is at 1.5%, if the Federal Reserve announces a target rate at 1.25%, explain how the Federal Reserve reduces the target federal funds rate by Open Market Operation with the aid of a supply and demand for reserves diagram.

Question 4:

(a) Suppose that the Fisher hypothesis holds for an economy that has an expected real interest rate r of 2%. For each of the expected inflation rates πe of 2, 4, 6, 8, and 10%, calculate the nominal interest rate i and the after-tax expected real interest rate ia if a tax rate t of 20% is imposed on the nominal interest rates.

(b) Discuss the possible societal effects of taxes on nominal interest rates.

Question 5:

(a) Briefly discuss the three major goals of using monetary policy by the Federal Reserve.

(b) Discuss under what economic situation the Federal Reserve will use an expansionary monetary policy and its impact on output, unemployment rate and inflation rate in the short- and long-run.