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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

What do you think might be lost-and by whom - if the Fed were to follow an easily understood rule as a guide for conducting monetary policy? Explain.

Suppose that the Fed implements each of the policy changes you discussed in Problem 16-12. Now explain how the net export effect resulting from these monetary policy actions will reinforce their effects that operate through interest rate changes.

Assume that the following conditions exist :

a. All banks are fully loaned up - there are no excess reserves, and desired excess reserves are always zero.

b. The money multiplier is 4.

c. The planned investment schedule is such that at a 4percent rate of interest, investment is \(1400billion. At 5percent, investment is \)1380billion.

d. The investment multiplier is 5.

e. The initial equilibrium level of real GDP is \(19trillion.

f. The equilibrium rate of interest is 4percent.

Now the Fed engages in contractionary monetary policy. It sells \)2billion worth of bonds, which reduces the money supply, which in turn raises the market rate of interest by 1 percentage point. Determine how much the money supply must have decreased, and then trace out numerical consequences of the associated increase in interest rates on all other variables mentioned.

Suppose that each 0.1percentage point increase in the equilibrium interest rate induces a \(5billion decrease in real planned investment spending by businesses. In addition, the investment multiplier is equal to 4, and the money multiplier is equal to 3. Furthermore, every \)9billion decrease in money supply brings about 0.1-percentage-point increase in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal.

a. How much must real planned investment decrease if the Federal Reserve desires to bring about an $80billion decrease in equilibrium real GDP ?

b. How much must the money supply change for the Fed to induce the change in real planned investment calculated in part (a)?

c. What dollar amount of open market operations must the Fed undertake to bring about the money supply change calculated in part (b) ?

You learned in an earlier chapter that if there is an inflationary gap in the short run, then in the long run a new equilibrium arises when input prices and expectations adjust upward, causing the short-run aggregate supply curve to shift upward and to the left and pushing equilibrium real GDP per year back to its long-run value. In this chapter, however, you learned that the Federal Reserve can eliminate an inflationary gap in the short run by undertaking a policy action that reduces aggregate demand.

a. Propose one monetary policy action that could eliminate an inflationary gap in the short run.

b. In what way might society gain if the Fed implements the policy you have proposed instead of simply permitting long-run adjustments to take place?
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