2020_Macro_ExCredit2 - Recall Monetary Base is defined as...

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Macroeconomics Extra Credit #2 Consider a restrictive monetary policy 1. Under what economic conditions will the federal Reserve want to use restrictive Monetary Policy? Inflation 2. Using Open Market Operations (OMO) will the Fed buy bonds from banks or sell bonds to bank If the Fed is enacting a restrictive monetary policy they will want to raise r and to sell bonds to banks. 3. What will happen to bank reserves and the monetary base? If they sell bonds to banks, the bank must pay for the bonds from their excess reserve. Resulting in a decrease in the bank reserves which are a part of the monetary base. Therefore the monetary base will decrease as well.
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Unformatted text preview: Recall Monetary Base is defined as: Excess Reserves + Currency in Circulation. 4. Show the effect graphically in the federal funds market. Be sure to label your graph and show the change in the fed funds interest rate. Assume the fed funds starts at 3% . S’ S D Q r 3.5% 3% 5. Assuming normal behavior graph the change to the yield curve. 6. What happens to longer term interest rates and investment? The longer term interest rate will increase which will lead to a decrease in investment. 7. What happens to the rate of GDP growth and the inflation rate? Slower GDP growth and less inflation. Rate of Return Time of Maturity 3% 3.5%...
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This note was uploaded on 04/15/2008 for the course ECON 2020 taught by Professor Kaplan,jul during the Spring '08 term at Colorado.

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2020_Macro_ExCredit2 - Recall Monetary Base is defined as...

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