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Suppose the Fed wants to raise the nominal interest rate.




1. (15 pts.);Suppose the Fed wants to raise the nominal interest rate. Explain the three available;mechanisms the Fed can use to achieve this goal. In your answer, use a graph of the;money market to show how the Feds action translates into a higher nominal interest;rate.;2. (10 pts.);a. (6 pts.);Explain the difference between the three Fed discount window programs.;b. (4 pts.);Why does the Fed set the discount rate above the Fed Funds rate?;3. (25 pts.);Suppose the Fed decides to sell $14 billion in Treasury bonds. Assume that the;reserve requirement is 8%, banks hold 4% in excess reserves, but the public holds no;cash.;What is the total increase or decrease in the money supply which would result from;the Feds action? Explain your answer, and show your calculations.;4. (50 pts.);Assume the public in the small country of Harvardia does not hold any cash.;Commercial banks, however, hold 5% of their checking deposits as excess reserves;regardless of the interest rate.;a. (5 pts.);Consider the balance sheet of one of several identical banks;ASSETS;Reserves;Loans;$ 400;$1,600;LIABILITIES & NET WORTH;Checking Deposits;$2,000;Net Worth;$;0;What is the required reserve ratio?;b. (10 pts.);If the total money stock (supply) is $100,000, find the total amount of reserves;held in the banking system. Show your work. Use a diagram to show what the;money supply curve looks like for this economy, fully labeled.;c. (10 pts.);The Harvardia Central Bank decides that it wants to cut the money stock in half.;It is considering an open market operation. How many dollars worth of bonds;should the Central Bank buy or sell? Assume that excess reserves are 5% and the;required reserve ratio is what you found in part a. Show your work.;d. (25 pts.);Beginning from the money market equilibrium that prevailed before the open;market operation, explain the effect of the Central Banks policy on the;equilibrium interest rate. Will the interest rate change more if the money demand;curve is steeper or flatter? Explain with reference to one well-labeled diagram.;(Hint: On one diagram, show both a steep and a flat money demand curve, along;with one money supply curve. Then show what happens along the two curves as;the money supply changes. To explain your result, think about what a steeper or;flatter money demand curve implies about money demand.)


Paper#18521 | Written in 18-Jul-2015

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