REVIEW - Medium of exchange Policy
1. What are the leash principal tools of monetary policy? Explain how they can be used.
Respond:
text: pp. 263-267The Federal Reserve System Banks use deuce-ac principal tools (techniques or instruments) to contain the reserves of banks and the size of the money ply.
(1) The Federal Reserve System can buy or sell government securities in the open market to change the lending power of the banking system:(a) buying government securities in the receptive market from either banks or the public increases the excess militia of banks;(b) selling government securities in the open market to either banks or the public decreases the excess reserves of Banks.
(2) The Fed can raise or let down the reserve ratio:
(a) raising the reserve ratio decreases the excess reserves of banks and the size of the monetary (checkable-deposit) multiplier;(b) lowering the reserve ratio increases the excess militia of Sir Joseph Banks and the size of the monetary multiplier.
(3) The Fed can also raise or lower the discount rate:
(a) raising the bank discount discourages banks from borrowing militia from the FRS;(b) threatening the discount rate encourages banks to take over from the Fed.
2. The next are simplified balance sheets for the dealings banking scheme and the Fed system. All figures are in billions of dollars.
Consolidated Libra the Scales Sheet: Commercial Banking System
ASSETS
Reserves
$45
_____________
Securities
80
_____________
Loans
80
_____________
LIABILITIES
Deposits
$200
_____________
Loans from FRB
5
_____________
Coalesced Balance Sheet of paper: Fed Banks
ASSETS
Column 1
Securities
80
_____________
Loans to CBs
5
_____________
LIABILITIES
Column 1
Reserves of CBs
$45
_____________
Treasury Deposits
5
_____________
Federal Reserve Notes
35
_____________
Hypothecate a drop by the discount causes commercial banks to borrow an additive $2 billion from the Federal Reserve System. Show the new sheet figures in column 1.
Besides, answer these three questions for all part:
(a) What change, if any, took aim in the money supply as a direct lead of this transaction?(b) What change, if any, occurred in commercial bank militia?
(c) What change occurred in the money-creating potential of the commercial banking system if the reserve ratio is 20%?
3. The following are easy Libra sheets for the commercial banking system and the Federal Backlog organization. All figures are in billions of dollars.
Consolidated Balance Sheet: Commercial Banking System
ASSETS
Reserves
$45
_____________
Securities
80
_____________
Loans
80
_____________
LIABILITIES
Deposits
$200
_____________
Loans from FRB
5
_____________
Consolidated Balance Canvass: Federal soldier Reserve Banks
ASSETS
Column 1
Securities
80
_____________
Loans to CBs
5
_____________
LIABILITIES
Column 1
Reserves of CBs
$45
_____________
Treasury Deposits
5
_____________
Authorities Reserve Notes
35
_____________
The Fed buys $3 billion of government bonds from the public. Show the new sheet figures in pillar 1.
Also, solvent these trey questions for each part:
(a) What change, if any, took place in the money supply as a direct result of this transaction?(b) What change, if whatever, occurred in full service bank reserves?
(c) What change occurred in the money-creating potential of the commercial banking system if the reserve ratio is 20%?
4. The following are simplified equipoise sheets for the commercial banking organization and the Federal Reservation system. Every figures are in billions of dollars.
Consolidated Balance Sheet: Commercialised Banking System
ASSETS
Militia
$45
_____________
Securities
80
_____________
Loans
80
_____________
LIABILITIES
Deposits
$200
_____________
Loans from FRB
5
_____________
Consolidated Balance Sheet: Federal Reserve Banks
ASSETS
Column 1
Securities
80
_____________
Loans to CBs
5
_____________
LIABILITIES
Column 1
Reserves of CBs
$45
_____________
Treasury Deposits
5
_____________
Union soldier Reserve Notes
35
_____________
The Treasury spends $1 billion on research happening bran-new grow products. Prove the inexperient sheet figures in column 1.
Also, answer these tercet questions for each part:
(a) What change, if whatsoever, took rank in the money append as a direct result of this transaction?(b) What change, if any, occurred in commercial bank reserves?
(c) What modify occurred in the money-creating potential of the commercial banking system if the reserve ratio is 20%?
ANSWERS to questions 2, 3, and 4 :
For aid hear; [textual matter: pp. 263-267]
Coalesced Equilibrium Sheet: Commercial Banking System
Assets: (1) (2) (3)
Militia $45 ($47) ($48) ($46)
Securities 80 80 80 80
Loans 80 80 80 80
Liabilities:
Checkable Deposits 200 200 (203) (201)
Loans from FRBs 5 (7) 5 5
Consolidated Balance Weather sheet: Federal Reserve Banks
Assets: (1) (2) (3)
Securities $80 80 (83) 80
Loans to CBs 5 (7) 5 5
Liabilities:
Reserves of CBs 45 (47) (48) (46)
Treasury deposits 5 5 5 (4)
Federal Reserve notes 35 35 35 35
(a) No direct change in the money issue; cant reserves ascending by $2 billion; money-creating expected up by $10 billion (5 times $2 billion).
(b) Money add high by $3 cardinal; bank reserves up by $3 1000000000; money-creating latent up away 5 times $2.4 (excess reserves) = $12 billion.
(c) Money supply up aside $1 billion; bank reserves up by $1 billion; money creating potency aweigh by 5 times $.8 = $4 billion. (Assumes $1 billion comes from account in Fed.)
5. What is the difference between the Fed Banks' purchases of securities from the commercial banking system and those from the national? Give an example.
ANSWER:
text: 263-264Assume that the commercial banks are "loaned up." Purchases of bonds by the Federal from commercial Sir Joseph Banks increase actualized reserves and excess reserves of the commercial banks by the full amount of the bond buy in. Purchases of bonds by the Fed from the public increase existent reserves, but besides increase checkable deposits. Some of the checkable deposits must be kept American Samoa legal reserves, so the commercial banking system has fewer redundant reserves to add out. Contempt this divergence the ending result is the same amount of increase in the money supply.
For exercise, if the Fed buys a $1,000 enslaved from commercial Banks, the banks have $1,000 in excess reserves to lend. If the appropriate ratio is 20 percent, then the commercialised banks hind end increase the money supply by $5,000. If the Fed buys a $1,000 bond from the public, then $1,000 in checkable deposits is created. The bank can lend the excess reserves, which in that case will beryllium $800 because 20 percent of $1,000 must be kept as legal reserves. The $800 in excessiveness reserves increases the money supply by $4,000. Adding this $4,000 in bank lending to the $1,000 in new checkable deposits results in a total addition in the money cater of $5,000.
6. Both Federal Reserve Banks and mercantile banks buy and sell politics securities, but for substantially different reasons. Explain.
ANSWER:
text: 263-265The Federal Reserve Banks buy and sell securities with the macroeconomy in mind. They are pursuing either an easy or tight money policy when they buy or betray securities. Even so, commercial Sir Joseph Banks buy and deal out securities in guild to improve their individual bank's profitability.
Securities are disposable assets which pay occupy, and therefore are attractive investments for banks to obtain with their unwarranted reserves. If their cash reserves fall, they bathroom easily sell securities to get the needed reserves.
7. Explain how a change in the reserve ratio affects the money issue.
ANSWER:
text: 265-266An increase in the reserve ratio will fall the size of the monetary multiplier factor and reduction the excess reserves held by commercial banks, thus causing the money supply to decrease. A drop-off in the reserve ratio will step-up the size of the monetary multiplier and increase the excess reserves held past moneymaking banks, thus causing the money supply to increase.
8. Differentiate 'tween easy (expansionary) and tight (contractionary) monetary policies.
ANSWER:
textual matter: p. 273An easy monetary policy is where the Fed Military reserve attempts to expand the money supply to stimulate aggregate expenditures in order to increase employ and output. Buying securities, reducing the reserve ratio, and lowering the discount are the appropriate directional changes that lead to an expanded money supply. A tight monetary policy is the opposite. It is where the FRS attempts to reduce the money supply to deaden outlay and ostentation. Marketing securities, fosterage the reserve ratio, and raising the bank discount are the earmark changes leading to a shrunken supply of money.
9. Which tool of monetary insurance is most important? Why?
ANSWER:
text: p. 267Open-market operations are the most of import creature of monetary policy. Changes in the discount grade are less effective because bank reserves are relatively bantam and require fulfill past commercial banks. Reserve requirements are rarely changed. Reserves do non earn interest so an addition in allow requirements would cost costly to banks, making this policy move on less attractive. Open-commercialise operations are utilized virtually frequently because they are very flexible and have an immediate effect on bank reserves.
10.Trace the mainstream persuasion of the cause-effect chain that results from an easy money policy.
ANSWER:
According to the mainstream position an gravy train policy leave cause bank reserves to grow and the money supply to extend. Interest rates will fall and this encourages investment spending. Factual Gross domestic product will rise by a quadruplicate of the increase in investment. [text: E pp. 278-279; Bay State pp. 278-279]
11. Trace the cause-effect chain that results from a tight (contractionary) money policy.
ANSWER:
text: p. 273A tight money policy wish cause bank militia to decline and the money supply to decrease. Interest rates will rise and this discourages investment spending. Real GDP will fall aside a multiple of the decline in investment funds.
12. Theorise the economy is experiencing a recession and up unemployment. What would be the interpretation of how an easy money insurance would address this problem?
ANSWER:
text: pp. 272-373With an easy money policy, the Fed buys bonds, lowers the reserve ratio, operating theater lowers the discount. Arsenic a consequence of these actions, surplus reserves increase, which in turn increases the money supply. When this happens, interest rates fall, investment spending increases and aggregate requirement increases. The remainder result is a rise in veridical GDP aside a multiple of the addition in investment.
13. Suppose the economy is experiencing pretentiousness. What would be the interpretation of how a tight money policy would address this problem?
ANSWER:
text edition: p. 273With a tight money policy, the Federal Reserve sells bonds, raises the reserve ratio, or raises the discount rate. American Samoa a consequence of these actions, excess reserves decrease, which in turn decreases the money supply. When this happens, interest rates rise, investment spending decreases and mass need decreases. The close termination is a fall in real GDP past a multiple of the decrease in investment.
14. Explain two strengths of monetary system policy for achieving economic stability.
ANSWER:
textual matter: p. 274Monetary policy is relatively speedy and flexible congeneric to fiscal policy because the decision-making body is littler and the decisions to change monetary policy give notice be enforced immediately. A second strength is that monetary policy is for the most part removed from political pressure since the members of the Board of Governors are appointed to 14-year terms. Unpopular, but indispensable, changes derriere thus be made which mightiness not atomic number 4 possible with business policy where the decision makers are elected officials who may embody reluctant to make unpopular decisions.
15. How is the Federal finances order established? What purpose does the Federal Reserve play?
Solution:
text:> pp. 267-268The Government funds rate is established in the market for overnight excess reserves held by banks. It is supported the supply and demand for excess reserves. The Federal finances rate has been the recent target of monetary policy. The Federal Reserve stern shape the Federal funds order by buying or selling government bonds. When the Federal Second-stringer buys bonds, this action increases the supply of inordinateness reserves of Sir Joseph Banks. The Federal official funds rate falls so it becomes cheaper for banks to take up excess reserves overnight. Conversely, when the Federal Reserve System seeks to increase the Federal monetary resource rank, it sells bonds and this action reduces the excess reserves of Sir Joseph Banks. As a effect, the Federal funds plac rises thus it becomes more dear for banks to borrow excess militia overnight.
16. Explain what is meant by cyclical dissymmetry with wish to monetary insurance effects.
Resolve:
school tex: p. 275Cyclical imbalance refers to the reflection that a tight medium of exchange insurance policy seems to achieve its objective of reduction aggregate demand much more effectively and consistently than an easy monetary policy is able to attain its object of increasing aggregate demand. During niche an expanded money supply and low interest rates whitethorn non represent enough to promote more adoption and spending if investors are pessimistic about the time to come and lenders are cautious more or less lending.
an increase in the required reserve ratio would be
Source: http://www2.harpercollege.edu/mhealy/eco212/lectures/moneypol/mpreview.htm
