Chapter 16: Monetary Policy (page 321)
Define Monetary Policy?
Interest Rates changes
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
In 2009, the inflation rate reached a negative 0.4 percent while the unemployment rate hit 10 percent. If the target inflation rate was 2 percent and the full-employment rate of unemployment was 5 percent, what value does the Taylor Rule predict for the Fed’s target interest rate back then? Would that rate have been possible given the zero lower bound problem?
a. negative 4.6 percent, not possible.
b. positive 0.4 percent, possible.
c. negative 5.6 percent, not possible.
d. positive 6.4, possible.
Who are the MPC?
Refer to Table 16.2 and assume that the Fed’s reserve ratio is 10 percent and the economy is in a severe recession. Also, suppose that the commercial banks are hoarding all excess reserves (not lending them out) because they fear loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence returns. By how many percentage points does the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? What is the size of the monetary multiplier before and after the change in the reserve ratio? By how much would banks’ lending potential decline as a result of the increase in the reserve ratio?
(1) Reserve Ratio, % | (2) Checkable Deposits, \( | (3) Actual Reserves, \) | (4) Required Reserves, \( | (5) Excess Reserve, \) (3-4) | (6) Money-Creating Potential of Single Bank, \(=5 | (7) Money-Creating Potential of Banking System, \) |
10 20 25 30 | 20,000 20,000 20,000 20,000 | 5,000 5,000 5,000 5,000 | 2,000 4,000 5,000 6,000 | 3,000 1,000 0 -1,000 | 3,000 1,000 0 -1,000 | 30,000 5,000 0 -3,333 |
What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?
Which of the following Fed actions will increase bank lending?
Select one or moreanswers from the choices shown.
a. The Fed raises the discount rate from 5 percent to 6 percent.
b. The Fed raises the reserve ratio from 10 percent to 11 percent.
c. The Fed lowers the discount rate from 4 percent to 2 percent.
d. The Fed sells bonds to commercial banks.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
