33.1 What is the basic determinant of (a) the transactions demand and (b)
the asset demand for money? Explain how these two demands can be
combined graphically to determine total money demand. How is the
equilibrium interest rate in the money market determined? Use a graph to
show the effect of an increase in the total demand for money on the
equilibrium interest rate (no change in money supply), Use your general
knowledge of equilibrium prices to explain why the previous interest
rate is no longer sustainable.
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33.2 What
is the basic objective of monetary policy? What are the major strengths
of monetary policy? Why is monetary policy easier to conduct than
fiscal policy?
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33.3 Use
commercial bank and Federal Reserve Bank balance sheets to demonstrate
the effect of each of the following transactions on commercial bank
reserves:a. Federal Reserve Banks purchase securities from banks.b. Commercial banks borrow from Federal Reserve Banks at the discount rate.c. The Fed reduces the reserve ratio.d. Commercial banks borrow from Federal Reserve Banks after winning an auction held as part of the term auction facility.
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33.4 Distinguish
between the Federal funds rate and the prime interest rate. Why is one
higher than the other? Why do changes in the two rates closely track one
another?
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33.5 Why
is a decrease in the supply of Federal funds shown as an upshift of the
supply curve in Figure 33.3, whereas an increase in Federal funds is
shown as a downshift of the supply curve?
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33.6 Suppose
that you are a member of the Board of Governors of the Federal Reserve
System. The economy is experiencing a sharp rise in the inflation rate.
What change in the Federal funds rate would you recommend? How would
your recommended change get accomplished? What impact would the actions
have on the lending ability of the banking system, the real interest
rate, investment spending, aggregate demand, and inflation?
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33.7 Explain
the links between changes in the nation's money supply, the interest
rate, investment spending, aggregate demand, real GDP, and the price
level.
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33.8 What
do economists mean when they say that monetary policy can exhibit
cyclical asymmetry? How does the idea of a liquidity trap relate to
cyclical asymmetry? Why is this possibility of a liquidity trap
significant to policymakers?
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33.9 LAST WORD
What are the three main aggregate supply factors that determine a
nation's potential (or full-employment) level of real output? What are
the four main components of aggregate demand? Explain: "Aggregate supply
factors determine a nation's potential GDP, whereas aggregate demand
factors determine whether or not the nation achieves its full employment
GDP." How does fiscal and monetary policy relate to aggregate demand?
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