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Chapter 16: Q.1 For Critical Thinking (page 366)

Why do you think that many people pay so much attention to likely future movements in the federal funds rate?

Short Answer

Expert verified

Many people pay so much attention to likely future movements in the federal funds rate it is the pinnacle money related to the power of the nation and from the exploration of social financial matters.

Step by step solution

01

introduction

Financial specialists utilize all suitable data as a base while shaping their assumptions regarding what's to come.

02

explanation

Individuals focus on the possible future developments of the Fed since it is based on that they structure their choices of ventures, reserve funds, wage climbs, requests and so on.

It is in the actual idea of the monetary specialists to benefit from the accessible data and past data to frame their assumptions.

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Most popular questions from this chapter

Take a look at the two panels of figure 16.2, and also consider figure 16-1. Suppose that instructions in the latest FOMC Directive call for a monetary policy action aimed at inducing individuals & businesses to demand a smaller quantity of money. Use appropriate panel of figure 16-2 to assist in explaining whether officials at the Federal Reserve Bank of New York's Trading desk should buy or sell bonds.

Suppose that to finance its credit policy, the Fed pays an annual interest rate of 0.50 per cent on bank reserves. During the course of the current year, banks hold $1 trillion in reserves. What is the total amount of interest the Fed pays banks during the year?

Why do you suppose that corporate cash holdings have decreased slightly since 2015?

Let's denote the price of a non-maturing bond (called a consol) as Pb. The equation that indicates this price is Pb=Ir, where I is the annual net income the bond generates and r is the nominal market interest rate.

a. Suppose that a bond promises the holder 500$ per year forever. If the nominal market interest rate is 5 per cent, what is the bond's current price?

b. What happens to the bond's price if the market interest rate rises to 10 per cent?

Suppose that following adjustment to the events in Problem 16-8, the Fed cuts the money supply in half. How does the price level now compare with its value before the income velocity and the money supply change?
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