Exam 14: Monetary Policy and the Federal Reserve System

Describe,in general terms,the lags in the effects of monetary policy on interest rates,output,and prices.Be sure to note how long it takes each variable to respond to policy changes.

Which of the following might the Fed rely on as an intermediate target?

Which of the following statements would Milton Friedman disagree with?

Which of the following is not a policy instrument of the Fed?

Which of the following best describes the relationship between the Fed funds rate and the discount rate,beginning in 2003?

If the Fed decreases the monetary base by $100 million and the money multiplier is 4,M1 will

Suppose the following statistics are available for the economy: CU = $60 billion RES = $100 billion DEP = $1000 billion (a)Calculate the size of the monetary base,the money supply,the reserve-deposit ratio,the currency-deposit ratio,and the money multiplier. (b)Suppose the currency-deposit ratio rises to .10,while the reserve-deposit ratio and monetary base remain unchanged.Calculate the money multiplier,the money supply,and the new values of CU,RES,and DEP.

Describe,in general terms,the strategy of monetary policy,explaining how monetary-policy tools are used to achieve the goals of monetary policy.What intermediate stages are important in going from tools to goals? What are the links between the different stages? How does the Federal Reserve use this strategy today?

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank reserves are equal to

The largest liability of the Fed from those on this list is

The current chairman of the Board of Governors of the Federal Reserve System is [NOTE: YOU MAY NEED TO UPDATE THIS QUESTION.]

The primary criticism by Keynesians of the credibility argument for rules is that

The Federal funds market is a market for trading funds between

The primary purpose of the discount window is to

According to the Taylor rule,if output is above its full-employment level and inflation is less than 2%,

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $35 million.Currency held by the nonbank public is

The problem with the strategy of achieving credibility through reputation is that

If the money multiplier is 10,the purchase of $1 billion of securities by the Fed on the open market causes a

In response to an unanticipated easing of monetary policy,the price level ________ at first,then ________ after a year.

Suppose that bank reserves (res)are a function of the nominal interest rate (i): res = 0.3 - 3i. The money multiplier is (cu + 1)/(cu + res),where cu is the currency-deposit ratio.Initially,suppose the real interest rate (r)equals 0.03,the expected inflation rate (pe)equals 0.03,and the currency-deposit ratio equals: cu = 0.4 - (10 × pe). The real money demand function is L(Y,i)= 0.8Y - 1500i,where Y is the level of output.The monetary base equals 100.The price level equals 1.0 initially and will not change in the short run,but will adjust in the long run. (a)Calculate the currency-deposit ratio,the reserve-deposit ratio,the money multiplier,the money supply,and the equilibrium level of output.Assume that this level of output equals full-employment output,so you are assuming that the economy is in general equilibrium with the price level equal to 1.0.Show your work. (b)Suppose financial innovation causes the reserve-deposit ratio to decline to res = 0.2 - 3i.Calculate the new currency-deposit ratio,the reserve-deposit ratio,the money multiplier,the money supply,and the equilibrium level of output in the short run,assuming a Keynesian model with the price level fixed in the short run.Show your work. (c)Calculate the equilibrium price level in the long run.Show your work.