Problems

  1. Go to the FOMC page of the Federal Reserve Board’s website (http://www.federalreserve.gov/FOMC/) to find the statement issued after the most recent FOMC meeting. (Click on “Meeting calendars and information” and then click on the most recent statement listed in the calendar.)

    • Question

      naDcpgXX5iUH0vrpDo7n7v5snYRmMcbZNAc5Gsc2rLn43+URcBGSqnGDtdxTOIBQCVH1+3yXXFk=
      Prob 17 1a. What is the target federal funds rate?

    • Question

      y+RXlghpsS3WzVVa/4omITW4Av8I2AGkCEh/KaUMZ6PJJTvn+Wxi7skHLVMZbfq9uE2roEkEMyrwKrPD6OkI/3xYJg8ou/cxdaZizg6aVTXjYRbXXUb4yMcmHRjIr21k7GlnPq6CVP3B3swz6h9TliK5Xb5V1t35wKB4dRJVOB3iHhTY0t8MS+LPR0YbEZI2xsvDlmPYvipYHzGEo7enYgLQd7I=
      Prob 17 1b. Is the target federal funds rate different from the target federal funds rate in the previous FOMC statement? If yes, by how much does it differ?

    • Question

      O2kv8jIuMY1QEAOOM+ufTisRN3W6au8jSxHu0ZlavNRtL2/eVtm4h4qUfPXel2Bc5YDB/k3TqfPAnwn0eIUyqbCQTIJB26sfksqsG6ZiIWU/nKe8ph9Z3tSYTx+5Z1NtqPiDgeSyoDA9B98dWy0aTY0Jp/YwdvGdjDKjLaLA7rPkZl6jgzL5DWWRmHs=
      Prob 17 1c. Does the statement comment on current macroeconomic conditions in the United States? How does it describe the U.S. economy?
  2. How will the following events affect the demand for money? In each case, specify whether there is a shift of the demand curve or a movement along the demand curve and its direction.

    • Question

      tTBC/S3BsbvNYOUS24mcyZTpXXMQqUqXrKgMoRwSd8Y+JTKh42kFbKgBR34desG7zA0wfsVBAd4da7pxSTZpLE0E6B4Og2v9
      Prob 17 2a. There is a fall in the interest rate from 12% to 10%.

    • Question

      mXxWGXEsVMbIyyXlaSeixBXh105BPu32OfNzGYUXMSFo0PBW2B+juRIX6UOo4w9BTS1NBtK8HRxW1qxwQqi0SvmNGSPnqlppANdKoR7aGbOeIEhP3W8xuBkHZtQZPyWd
      Prob 17 2b. Thanksgiving arrives and, with it, the beginning of the holiday shopping season.

    • Question

      y9fXjBE8kdjG3sifPN0TOTgmgs8gD7gDk98UhB8Ws6Cac4ngTs5WeoEFYhRqlkqfOI74FrmS8Ct8kAFbnew15OliRt4IQRNP8QSjqZIEToaFYpMZupLtUzF1WRw=
      Prob 17 2c. McDonald’s and other fast-food restaurants begin to accept credit cards.

    • Question

      qhSg07szyLBdkZpuwHZMDwxuNwM7Pz/6Rryusizfu4IAVJt1jGsxReGWNAmfNta8QjYp0O4J2flUL8n2htGxon2NJFKQ/0kOrC16+6phj6bF9uDd
      Prob 17 2d. The Fed engages in an open-market purchase of U.S. Treasury bills.

    • Question

      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
      Prob 17 3a. Go to www.treasurydirect.gov. Under “Individuals,” go to “Learn about Treasury Bills, Notes, Bonds, and TIPS.” Click on “Treasury bills.” Under “at a glance,” click on “rates in recent auctions.” What is the investment rate for the most recently issued 26-week T-bills?

    • Question

      2X1j3f0sXUTh5roN5bgVQqU8VzIxF1hqEPK02Os1E7/kF4/4ncMNcP9+qDEJ5PF2Hiwduwxl8X3eEh82xqsKKdf+tfH8yYdk18d1yyYCVhdbTBpQ+zHRxF1OI1Dz58CePjTDVe+HgXs=
      Prob 17 3b. Go to the website of your favorite bank. What is the interest rate for six-month CDs?

    • Question

      tE+0eiCLNCyKuP7WMQqGkVgTwcLWJ59RKCpLPQ+zaEdSA8a4wd/uHPVZQnOnHM0cnhcQ+QYnAEG8raF9eRRo+yqzoiZuQUjI3I5YeRue8ONrViva9MP600zcsL0=
      Prob 17 3c. Why are the rates for six-month CDs higher than for 26-week Treasury bills?
  4. Go to www.treasurydirect.gov. Under “Individuals,” go to “Learn about Treasury Bills, Notes, Bonds, and TIPS.” Click on “Treasury notes.” Under “at a glance,” click on “rates in recent auctions.” Use the list of Recent Note, Bond, and TIPS Auction Results to answer the following questions.

    • Question

      /X8vh77BcuUMS4cSskNSN2ke1QjhwYmwZsAjSLO4Q2Pl+jmr+vppiQnceeehTBIZN2vlHds1/IAF9Grp+/hRVLvLQz7YWrJI
      Prob 17 4a. What are the interest rates on 2-year and 10-year notes?

    • Question

      OetnJ2cIAPZQIZaM65xhJPeH4n69JBqPbiIWD+KbUuieoHj5cv7UFQVH6mTERxPphYqkbz1Eqi5nBQVmuL2IIkni8DrGE8yWCTWjfEeRn4voFb4kedpQv/m/fwgNUnsBZCT+TobEKkB3RAS6lunJX/272MgotA7XSj92+91lmkNVvQogWPyMFVmVzNjXgsgKU7YuYTZFZay+GqUQKBO5629F+UF0aqUEsa4J5WvLfBf5HK6KgWSTjuJZxRSh1M4d+izmKiuU9wB94ImZ
      Prob 17 4b. How do the interest rates on the 2-year and 10-year notes relate to each other? Why is the interest rate on the 10-year note higher (or lower) than the interest rate on the 2-year note?

  5. Question

    VC+nUQTfLEaJnBWqMEjsX5MUJvUA/EIcmVxsqc9yJf24slBhv5jZVYHoDyJe00IIb+WW+MEzkj6s5J0EtmYAUby+nDx0i6Q+bAqvRfO26uHb1uqNrRmfPZySNruYwwcfBRRbQ4aVzLcXr9vw4GVOW2uVmYdPMImdjLplHNKgF8P/KODSU71BlokU3/KTGJ0P1aJe02HJwG4mljoBnW91iK5tvebYeokaUfQ/w0bA+3Hnyyg45TD0Qs29AezF4gh2qxojjDsrAj/krd1+/5wCQFa7jz/iUReUUPoE4Z/+VE6Zq7N4cfK0112V6oR+mkYaOyzSu/PsNn3oiK//S1/LgSochc1kUy2NsjkVpqDlYPEhdcOczwtPURHOS7frF02NMLYsf3mlSjs14TUPPusK708zNw/9DhM3XdA9ZC9ppe2CMu8T91F9CBHNAfvrFngG2k8Ea7E3ryHKZBBtXRm/DkLWHFDDSboW

    Prob 17 5. An economy is facing the recessionary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy? How will the interest rate, investment spending, consumer spending, real GDP, and the aggregate price level change as monetary policy closes the recessionary gap?

  6. Question

    Q7VMvo0i/1CEsH/ajOptS8Wdc7ZELRhr0oB/BHwjBDTKNwkMdbMS+5ikqqQP1Zk3IfNLZtQcKya/+RGsNgA0rUSQ2F4/P0T09RqNDpcx/M2Tui3nFVhijifep211o8Zxuu6PuTt5wXuOBKEYMa1BvG3Is8DYe8TXXO9IsOjtrXjZYI46hJKayAERatgzcTKv24xUgCNGMeg7pu9/AxrltcDisAYT3Jxhv8/HYiQMS3Ss1+6UKkPJlZ6NJnJff2nt7iGDE4iixQ8zazlXWfTapg4z6kH/8P5Xy6tsAeRf/31gMlL84fytRXn2ReWcuMZY9btPRAxQZIrjiPCltemsclFn7ynE/L/Gb96FPyp/s91yzw214QPPsQiTlWYtYCtDl7QtP+M3L2zUwzaq/EEQbe2BhPRD1dP2k2P5DlK2/OMD+jtIoybAayAWKG267Uk7xId8R9nmMUHR5Lax5yNc476Ic3Dnkcjs

    Prob 17 6. An economy is facing the inflationary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy? How will the interest rate, investment spending, consumer spending, real GDP, and the aggregate price level change as monetary policy closes the inflationary gap?
  7. In the economy of Eastlandia, the money market is initially in equilibrium when the economy begins to slide into a recession.

    • Question

      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
      Prob 17 7a. Using the accompanying diagram, explain what will happen to the interest rate if the central bank of Eastlandia keeps the money supply constant at .

    • Question

      eNnufTuzHAPqFhXea8sLFA1NLHVp6DUkJceGy+mXlYJljSPweB8T67PWxmVgRebFUH01gTfcIpzlSOmQjuqcb3o5MbkRgrLhNbxzi36Vh28ALdwIYXdH0VJuXO8Di+r+ONH+JMuRpEEOGOpWkztnWRy/lqG+yQ5Pk9U8aUH6vZAC4GGL5PnKV+0Ml9BDPUlC3SuBIVDyhmb5Uz1osCDxL8Brm9Sgi6q8pzgJf+/NwQbQKQ78yIIPq9IpSaUnRvwhn6oUDS+cEv/UoeJUVx2BZQ1fesABGh2isvG/fk/WPsuqhwtoaBPQBX/gXLUX7vgLoSFY9UkntDihE6ILHmrSlsh7+nRtG7jk4Wd4F09qjh43j8b5
      Prob 17 7b. If the central bank is instead committed to maintaining an interest rate target of r1, then as the economy slides into recession, how should the central bank react? Using your diagram from part a, demonstrate the central bank’s reaction.
  8. Suppose that the money market in Westlandia is initially in equilibrium and the central bank decides to decrease the money supply.

    • Question

      Y8M7dfavWhO9C3ZxC68+FbiXAukRpRy0MWcJqPL5YMA2nVlZPcpnGolOGHLODlBPpOptJ1YC9XjJurXqDWFDlhXyb/VxjeuL0EYTVDPGTx0wGd7uDxRgf65a1eI/vwiwlr+MWBheoOiZVlmwBEw8FozXPYZMSdeeV/Xb1w==
      Prob 17 8a. Using a diagram like the one in Problem 7, explain what will happen to the interest rate in the short run.

    • Question

      krE1RsqAY3e8iRwTMJ6WE3EoVqezUWHbktZvebn9W9ylJUJuDSVK0fqIvrLTM4vaQSctTNi0LfIAGoaJrpjoHNCbSyNzY7f0
      Prob 17 8b. What will happen to the interest rate in the long run?

  9. Question

    ndDPH7CYCf8l2byxR6UdkOCAtW1j7sVIetG0/LVaxoarXqKLSa43KjaQsKjAOZipwFMwjq8aByZwExEQNsvBxpvENuWf8SowESklwEqivRLVIAz6x/bS1xKOSn11oo97WTCj2a3BdGQFhYToeVIX9STqqpU8/Ttiblxqy+0cZOr4KHmKR+qgNArAE/J6mPbQiQg8Yq4kg0DP6s6fRzokg/kulb+fftci4CxukTymtoYr0XKX774OK7aeBDtZYgCjXAxvXlYnY+11k86y2yEw/alj42sXE2jJZgSsPjDfyboSoAb/dLfa/0JSbDVMALNujBgHPyqZndlb62+C9Q4JZfZBvqUs/fhw7z4cU7rnzAg2ykc0kT5PPwmO7XgQLbvNr/EARVKKhUBkPZo70CNk91fyjjHN/4vR2nEdtgxSdytwjtJicZZppVlGXTPmbdihC/uAIEwE8B48Wou2uPAz+wq7TMbXwRe5IWtNTA==
    Prob 17 9. An economy is in long-run macroeconomic equilibrium with an unemployment rate of 5% when the government passes a law requiring the central bank to use monetary policy to lower the unemployment rate to 3% and keep it there. How could the central bank achieve this goal in the short run? What would happen in the long run? Illustrate with a diagram.

  10. Question

    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
    Prob 17 10. According to the European Central Bank website, the treaty establishing the European Community “makes clear that ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment.” If price stability is the only goal of monetary policy, explain how monetary policy would be conducted during recessions. Analyze both the case of a recession that is the result of a demand shock and the case of a recession that is the result of a supply shock.

  11. Question

    7P/XZdeTVdbOdBluZdk09a/N3mFZgEbjQJcHQPwRN0vZkXfcDy5baMwEOYJtGs5epelzvPfxWhBBycBmoB6gjVXxdvV6Ykqem+UW9W2DpoWO25R5gTUJFYQkgk/HlIU2sQgMrTQwS5eB8C1QXSCuh7MqWTj1bLmjp4dJg/fYtRmdBjnIWoeVU5+hgl8yyuYuVjiWqXh5kqVd95oEuzQ3I+aiLqOvnRk4AjA66rQ5VNj7q9fAuVkk21/tGrV8KgYwlqoogAo9eUwhjgXSknqcgvRmYG+XtLQ9bVH7KGhLhMrGQcuzfPWBU3048cgAZCef93mLJSmsXpFOOgfxzwIpOKJmcVH3cQpoDw0HepJxh3m3Kq6fv0tHbl/JnRpvy7erl+L11cK3UOPGhoicmpiLDCdr5XKo0vqKDmVEUgfkJR/Mub7EWCL+dGCldFYVw+Yc53jBJ0P4i3srioonrOzJjKH6e4z56VtoB/KoJSmuQnS0G4LXsdXpFOBGehULHC487gl6R1mnq2SeTnm7idvkZh3NfBVVkNfnS1mzCv3MVOq/SUwCFXEPdkaNvaSl3/OE9QcPHSkSsiYDrlTdbYgFag==

    Prob 17 11. The effectiveness of monetary policy depends on how easy it is for changes in the money supply to change interest rates. By changing interest rates, monetary policy affects investment spending and the aggregate demand curve. The economies of Albernia and Brittania have very different money demand curves, as shown in the accompanying diagram. In which economy will changes in the money supply be a more effective policy tool? Why?

  12. Question

    xOBPdz+BH1N1pxx1h2w7KI2KRS+y6ZNKr4BUVBBy03l2W1Wse62VHccLdp6AMlPmVeaI74j0jAXU4UtY99Epemu/Ac1AsjA9XK1xkk9gHqLtBO+OuDp01Bci+PFU5bNSDQhRdp1uHW6sQ4l8nvsU8sIN8ajh1sEZw7Mve/Oth2S6jVRDUQ0FK4KA8C/sbY7K/FOw2E1Ay2O2t0DFTlMJinBg3lq9Ko77jTvmbWLErZjEfxHiQiMVR9TNaPRq+LX4AOFy4IOID0hXIrUG76iYr2jksJlyiwEEnbZPcNQaIfX9IwSu9KHhE3qBAb03OItprgWbjVZ30weyGSXUcpPa4JMcS+aTtIWpFUTBSvJtsRggohnzKqHAEXmOeB0EcIrt5PDGfuGYyIfT7HcD6UZsOA==
    Prob 17 12. During the Great Depression, businesspeople in the United States were very pessimistic about the future of economic growth and reluctant to increase investment spending even when interest rates fell. How did this limit the potential for monetary policy to help alleviate the Depression?

541

Extend Your Understanding

  1. Because of the economic slowdown associated with the 2007–2009 recession, the Federal Open Market Committee of the Federal Reserve, between September 18, 2007 and December 16, 2008, lowered the federal funds rate in a series of steps from a high of 5.25% to a rate between zero and 0.25%. The idea was to provide a boost to the economy by increasing aggregate demand.

    • Question

      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
      Prob 17 13a. Use the liquidity preference model to explain how the Federal Open Market Committee lowers the interest rate in the short run. Draw a typical graph that illustrates the mechanism. Label the vertical axis “Interest rate” and the horizontal axis “Quantity of money.” Your graph should show two interest rates, r1 and r2.

    • Question

      6jgQgwWQspjM87HnKngMGeem1vREJVBjzLCnk3WpD+NWNisZP4LmVIaBmpTmdtBz/RPa8Gkwehofvv1Mi+2yJHmawWXOJ++9/3pJfHkyHbppZkz6JrZiAjwgY4SLPIqo9aNbQgMN3kItKJ6XeY+YUQ6vRNU=
      Prob 17 13b. Explain why the reduction in the interest rate causes aggregate demand to increase in the short run.

    • Question

      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
      Prob 17 13c. Suppose that in 2013 the economy is at potential output but that this is somehow overlooked by the Fed, which continues its monetary expansion. Demonstrate the effect of the policy measure on the AD curve. Use the LRAS curve to show that the effect of this policy measure on the AD curve, other things equal, causes the aggregate price level to rise in the long run. Label the vertical axis “Aggregate price level” and the horizontal axis “Real GDP.”

542