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- “If the demand for reserves did not fluctuate, the Fedcould pursue both a reserves target and an interest-ratetarget at the same time.” Is this statement true, false, oruncertain? Explain.An important way in which the Federal Reservedecreases the money supply is by selling bonds to thepublic. Using a supply and demand analysis for bonds,show what effect this action has on interest rates. Isyour answer consistent with what you would expect tofind with the liquidity preference framework?9. If the demand for reserves did not fluctuate, the Fed could pursue both a reservestarget and an interest-rate target at the same time.” Is this statement true, false, oruncertain? Explain.
- Suppose that the reserve requirement for chequing deposits is 15 % and the banks donot hold any excess reserves. What is the effect on the economy’s reserves and themoney multiplier if the central bank sells $2 million of government bonds?The demand curve and supply curve for one-year discount bonds with a face value of $1,050 are representedby the following equations:Bd: Price = -0.8 * Quantity + 1160Bs: Price = Quantity + 720Suppose that, as a result of monetary policy actions, theFederal Reserve sells 90 bonds that it holds. Assume thatbond demand and money demand are held constant.a. How does the Federal Reserve policy affect the bondsupply equation?b. Calculate the effect on the equilibrium interest rate in this market, as a result of the FederalReserve action.What procedures can the Fed use to control the federalfunds rate? Why does control of this interest rate implythat the Fed will lose control of nonborrowed reserves?
- Suppose that the reserve requirement for checkingdeposits is 10 percent and that banks do not hold anyexcess reserves.a. If the Fed sells $1 million of government bonds,what is the effect on the economy’s reserves andmoney supply?b. Now suppose that the Fed lowers the reserverequirement to 5 percent but that banks chooseto hold another 5 percent of deposits as excessreserves. Why might banks do so? What is theoverall change in the money multiplier and themoney supply as a result of these actions?Assume the Federal Reserve has a federal funds rate target (ffr*) at 1.5%. If there is anunexpected decrease in the demand for reserves and the Federal Reserve wants to maintainthe target rate, how does it affect the money supply? Explain with the aid of a supply anddemand for reserves diagram.The Federal Reserve has raised the Federal Funds rate by 3.75 percent within the past year. Ifa bank had capital of 10 percent when the Fed began raising rates and has no loans at risk ofdefault, under what circumstances will its capital position be compromised? Please be specific.
- “If f increases, then the Fed can keep output constantby reducing the real interest rate by the same amount asthe increase in financial frictions.” Is this statement true,false, or uncertain? Explain your answer.Suppose the central bank is following a constantmoney-growth-rate rule and the economy is hit witha severe economic downturn. Use an aggregate supply and demand graph to show the possible effects onthe economy. How does this situation reflect on thecredibility of the central bank if it maintains the moneygrowth rule? How does it reflect on the central bank’scredibility if it abandons the money growth rule torespond to the downturn?12. what factors motivate the central bank to require tge two selected Dls to hold minimum amounys of liquid assets?