1.Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve buys $50 million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all loans create an equal amount of deposits in the banking system), the minimum reserve ratio is 10%, and banks hold no excess reserves, by how much will deposits in the commercial banks change? By how much will the money supply change? Show the final changes to the T-account for commercial banks when the money supply changes by this amount.

2.Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve sells $30 million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all new loans create an equal amount of checkable bank deposits in the banking system) and the minimum reserve ratio is 5%, by how much will checkable bank deposits in the commercial banks change? By how much will the money supply change? Show the final changes to the T-account for the commercial banks when the money supply changes by this amount.

3.Go to the FOMC page of the Federal Reserve Board’s web-site (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.)

4.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.

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6.Go to www.treasurydirect.gov. Under “Individuals,” go to “Treasury Bills, Notes, Bonds, TIPS, and FRNs.” 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.

7.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?

8.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?

9.In the economy of Eastlandia, the money market is initially in equilibrium when the economy begins to slide into a recession.

10.Suppose that the money market in Westlandia is initially in equilibrium and the central bank decides to decrease the money supply.

11.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.

12.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.

13.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?

14.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?

15.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.