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Chapter 16: Q.20 - Problems (page 369)

Take a look at Figure 16-3. Discuss a policy action that the Trading Desk at Federal Reserve Bank of New York could undertake in order to bring about the increase in aggregate demand displayed in the figure

Short Answer

Expert verified

The Desk should buy securities in open market operations, to increase Aggregate Demand in the economy.

Step by step solution

01

Aggregate Demand Concept 

Aggregate Demand includes the sum total value of all final commodities & services, which are planned to be bought by all the sectors of an economy.

  • AD is directly related to level of money supply in the economy. Higher money supply means more AD & lower money supply means less AD
02

FOMC Concept 

Federal Open Market Operations are process of buying & selling of government securities in open market. It is used as a monetary (quantitative) tool for regulating Aggregate Demand

  • Central bank prefers to buy securities (giving commercial banks & public cash) - to increase money supply, AD in the economy.
  • Central bank attempts selling securities (getting cash from commercial banks & public) - to decrease money supply, AD in economy

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Most popular questions from this chapter

If the FOMC were to aim to attain targets for M1 or M2 instead of the federal funds rate, would people be as concerned with trying to anticipate future federal funds rate changes? Explain.

On the basis of Problem 16-1, imagine that initially the market interest rate is 5 per cent and at this interest rate you have decided to hold half of your financial wealth like bonds and half as holdings of non-interest-bearing money. You notice that the market interest rate is starting to rise, however, and you become convinced that it will ultimately rise to 10 per cent.

a. In what direction do you expect the value of your bond holdings to go when the interest rate rises?

b. If you wish to prevent the value of your financial wealth from declining in the future, how should you adjust the way you split your wealth between bonds and money? What does this imply about the demand for money?

Suppose that the quantity of money in circulation is fixed but the income velocity of money doubles. If real GDP remains at its long-run potential level, what happens to the equilibrium price level?

To implement a credit policy intended to expand the liquidity of the banking system, the Fed desires to increase its assets by lending to a substantial number of banks. How might the Fed adjust the interest rate that it pays banks on reserves in order to induce them to hold the reserves required for funding this credit policy action? What will happen to the Fed's liabilities if it implements this policy action?

During an interval between mid-2010 and early 2011, the Federal Reserve embarked on a policy it termed "quantitative easing." Total reserves in the banking system increased. Hence, the Federal Reserve's liabilities to banks increased, and at the same time, its assets rose as it purchased more assets-many of which were securities with private market values that had dropped considerably. The money multiplier declined, so the net increase in the money supply was negligible. Indeed, during a portion of the period, the money supply actually declined before rising near its previous value. Evaluate whether the Fed's "quantitative easing" was a monetary policy or credit policy action.
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