Why fed''s staff underestimated the effect of the increase

Assignment Help Finance Basics

Reference no: EM131304046

Allan Meltzer of Carnegie Mellon University wrote the following about how the Federal Reserve Board's staff analyzed the likely effects of the large excess reserves banks were holding in the mid-1930s: [The] Board's staff . . . [assumed] that none of the excess reserves were held for reasons of safety based on experience. The result was a large overestimate of potential monetary and credit expansion and prospective inflation and an underestimate of the effect of higher reserve requirement ratios.

a. Why might banks in the mid-1930s have been holding reserves for "reasons of safety"?

b. What does Meltzer mean by "potential monetary and credit expansion"?

c. If banks were holding excess reserves for reasons of safety, why might the Fed's staff have been overestimating potential monetary and credit expansion?

d. What was the effect on banks of the Fed's decision to increase the required reserve ratio? What insight does Meltzer give into why the Fed's staff underestimated the effect of the increase?

Reference no: EM131304046

Questions Cloud

How important are services in the us economy : How important are services in the U.S. economy?- Identify and discuss the major service characteristics.- For each marketing-mix element, which service characteristics are most likely to have an impact?

Analyze and critique the documentary movie global village : analyze and critique the documentary movie " Global Village".

Make recommendations for repositioning : Identify where it is currently positioned, and make recommendations for repositioning. Explain and defend your suggestions.

Constant growth valuation crisp : Constant Growth Valuation Crisp Cookware's common stock is expected to pay a dividend of $1.5 a share at the end of this year (D1 = $1.50); its beta is 1.05; the risk-free rate is 5.8%; and the market risk premium is 4%. The dividend is expected to g..

Why fed''s staff underestimated the effect of the increase : The result was a large overestimate of potential monetary and credit expansion and prospective inflation and an underestimate of the effect of higher reserve requirement ratios.

Analyze and critique the documentary movie mumia abu jamal : analyze and critique the documentary movie Mumia Abu Jamal

Market enterprises would like to issue bonds : Market enterprises would like to issue bonds and needs to determine the approximate rate they would need to pay investors. a firm with similar risk recently issued bonds with the following current features: a 5% coupon rate, 10 years until maturity, ..

Explain the purpose of a swot analysis : Discuss the advantages and disadvantages of the SWOT analysis. Explain the purpose of a SWOT analysis. Are there other alternative to using a SWOT (define at least ONE).

Identify a familiar product that recently was modified : Identify a familiar product that recently was modified, categorize the modification, and describe how you would have modified it differently.

User Account

All Pages