Chapter 16: Q10. (page 347)
True or False: In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.
The given statement is true.
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Define Monetary Policy?
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?
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?
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 is the basic determinant of (a) the transactions demand and (b) the asset demand for money? Explain how to combine these two demands graphically to determine total money demand. How is the equilibrium interest rate in the money market determined? Use a graph to show how an increase in the total demand for money affects the equilibrium interest rate (no change in the money supply). Use your general knowledge of equilibrium prices to explain why the previous interest rate is no longer sustainable.
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