Chapter 16: Q1. (page 347)
When bond prices go up, interest rates go _______.
a. up
b. down
c. nowhere
The correct option, in this case, will be ‘b).down’.
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Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.
The Taylor Rule puts _________ as much weight on closing the unemployment gap as it does on closing the inflation gap.
a. just
b. twice
c. half
d. ten times
True or False: A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.
In the tables that follow, you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the balance sheets will read after each transaction a to c is completed. Do not cumulate your answers; that is, analyze each transaction separately, starting in each case from the numbers provided. All accounts are in billions of dollars.
\( | Consolidated Balance Sheet: All commercial banks | |||
1 | 2 | 3 | ||
Assets Reserve Securities Loans | 33 60 60 150 3 | |||
Liabilities and net worth: Checkable deposits Loans from federal reserve banks |
\) | Consolidated Balance Sheet: The 12 Federal Reserve Banks | |||
1 | 2 | 3 | ||
Assets Securities Loans to commercial banks | 60 03 33 | |||
Liabilities and net worth: Reserves of commercial bank | ||||
Treasury deposits Federal reserve notes | 3 27 |
a. A decline in the discount rate prompts commercial banks to borrow an additional \(1 billion from the Federal Reserve Banks. Show the new balance-sheet numbers in column 1 of each table.
b. The Federal Reserve Banks sell \)3 billion in securities to members of the public, who pay for the bonds with checks. Show the new balance-sheet numbers in column 2 of each table.
c. The Federal Reserve Banks buy $2 billion of securities from commercial banks. Show the new balance-sheet numbers in column 3 of each table.
d. Now review each of the previous three transactions, asking yourself these three questions: (1) What change, if any, took place in the money supply as a direct and immediate result of each transaction? (2) What increase or decrease in the commercial banks' reserves took place in each transaction? (3) Assuming a reserve ratio of 20 percent, what change in the money-creating potential of the commercial banking system occurred as a result of each transaction?
Suppose a bond with no expiration date has a face value of \(10,000 and annually pays \)800 in fixed interest. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the bond price at each of the interest yields shown. What generalization can you draw from the completed table?
Bond Price \( 8,000 | Interest Yield, % ________ |
______ | 8.9 |
\)10,000 $11,000 _______ | ________ ________ 6.2 |
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