Chapter 16: Monetary Policy (page 321)
What are the components affected in a contractionary monetary policy?
C, I, (X-M)
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Define Monetary Policy?
Assume that the following data characterize the hypothetical economy of Trance: money supply = \(200 billion; quantity of money demanded for transactions = \)150 billion; quantity of money demanded as an asset = \(10 billion at 12 percent interest, increasing by \)10 billion for each 2-percentage-point fall in the interest rate.
a. What is the equilibrium interest rate in Trance?
b. At the equilibrium interest rate, what are the quantity of money supplied, the quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance?
In 1980, the U.S. inflation rate was 13.5 percent, and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed’s target interest rate? Would you be surprised to learn that the Fed’s targeted interest rate (the federal funds rate) reached 18.9 percent in December 1980?
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?
Suppose that actual inflation is 3 percentage points, the Fed’s inflation target is 2 percentage points, and unemployment is 1 percent below the Fed’s unemployment target. According to the Taylor rule, what value will the Fed want to set for its targeted interest rate?
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