Exam 14: Monetary Policy

Suppose the economy is in recession. Write a letter to the brand-new chairman of the Federal Reserve suggesting how the Fed might help end the recession. Be sure to explain how a change in monetary policy will affect economic activity.

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, there will be ________ in the exchange rate, ________ in imports and ________ in exports.

List and briefly explain the steps in how monetary policy affects real GDP in the AS/AD model. Tell what the impact is when the Fed eases monetary policy to fight a recession.

If the Fed lowers the federal funds rate, the first effect in an AS/AD figure is a ________ shift of the ________ curve.

In December, the Bank of England reduced interest rates by another 50 basis points (a basis point is 0.01 percentage point)after it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists "... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,"...while others "...saw a bigger 75 point cut"...or "a 100 basis point move." Reuters, 11/27/2008 In order to ________, the Bank of England's rate cut must ________.

In the aggregate demand/aggregate supply framework, lowering the federal funds rate has what short-run effects on real GDP?

The Fed buys U.S. government securities from banks in order to

"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

Achieving the goal of "moderate long-term interest rates" means that the Fed needs to keep

By using open market operations, the Federal Reserve

If the Fed wants to increase the quantity of money, it can

-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.

Explain the ripple effects of a sale of securities in an open market operation.

"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 As a result of the Fed's policy, which of the rates will increase?

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

If the Fed lowers the federal funds rate so that the exchange rate falls, then imports ________ and exports ________.

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

Former Fed Chairman Ben Bernanke has suggested that a core inflation rate of ________ is the equivalent of price stability.

Monetary policy includes adjustments in ________ so as to change ________.

If the Fed is concerned with inflation it will ________ the federal funds rate in order to ________ aggregate demand.