Exam 14: Monetary Policy

In the short run, a decrease in the federal funds rate by the Fed

In November 2008, the Reserve Bank of India (RBI) lowered its "repo" rate, the rate at which it lends to banks, from 8 percent to 7.5 percent. Only two weeks earlier, it had lowered the rate from 9 percent to 8 percent. The Economist, 11/6/2008 The Reserve Bank of India is lowering its rates to fight

Explain how the Fed's response to a recession works its way through the economy to ultimately affecting real GDP and the price level.

If the Fed carries out an open market operation and sells U.S. government securities, as long as the federal funds interest rate remains within the corridor the federal funds rate ________ and the quantity of reserves ________.

If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rate falls and the quantity of money increases.

"As the Fed Chases Inflation, Critics Shout, 'Faster!'" "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "...the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake." Www)nytimes, 7/1/2004 Economists estimate that if the Fed's policy was enacted in July 2004, the impact on the economy

-In the above figure, if the economy is initially at point c, the short-run effect of a hike in the federal funds rate is given by movement from point

-The figure above shows the demand for money in Kiteland. a) If the Kiteland Central Bank has set the quantity of money so that the equilibrium interest rate is 4 percent, draw the supply of money curve. b) Suppose Kiteland's real GDP increases so that the demand for money changes by 100 billion yaks. The Kiteland Central Bank takes no actions. Show the effects of this event on your figure. What happens to the interest rate? What happens to the quantity of money in the economy? c) If the Central Bank wants to prevent the interest rate from changing, what must it do to the quantity of money? Draw the new supply of money curve. d) In order to change the quantity of money to keep the interest rate constant, suppose the Kiteland Central Bank uses open market operations. Does it make an open market purchase or an open market sale? Explain your answer.

Usually, the Federal Reserve changes its target for the federal funds rate in units of

In the short run, monetary policy can

In the short run, an increase in the federal funds rate ________ the real interest rate and ________ investment.

If the Fed buys U.S. government securities and the federal funds rate stays in the corridor

If the federal funds rate is below the Fed target, the Fed will conduct an open market sale to increase the federal funds rate to the desired level.

The Taylor Rule maintains that the Fed should set the growth rate of the quantity of money equal to the growth rate of real GDP.

The ripple effects that occur when the Fed changes the federal funds rate do NOT include

When the Federal Reserve fights inflation via open market operations, the supply of reserves curve shifts ________ and the supply of money curve shifts ________.

In the market for bank reserves, if the federal funds rate target is higher than the federal funds rate, the Fed will take action to ________ reserves.

When the Federal Reserve increases the Federal funds rate

The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States. www.nytimes.com, 11/26/2008 Other things remaining the same, which of the following components will decrease in response to the bank's actions? I. exchange rate II. interest rate III. investment

If the interest rate on Treasury bills is higher than the federal funds rate, the quantity of overnight loans supplied ________ and the ________ for Treasury bills increases.