Ch 17 Practice problem with solution

Ch 17 Practice problem with solution - Ch 17 Practice...

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Ch 17 Practice problem with solution 1. Discuss the tools of the U.S. government's "demand-side" policy. Include in your discussion of these tools the relative advantages and disadvantages of each in terms of the effect of the use of these tools on the economy. The two tools of the government's "demand-side" policy are fiscal and monetary policy. Fiscal policy is the use of government spending and taxing for the specific purpose of stabilizing the economy. Fiscal policy, once enacted, has the most direct and immediate effect on the economy. However, the formulation and implementation of fiscal policy is extremely slow, as such policy must be approved by both the legislative and executive branches of the federal government. Monetary policy consists of actions taken by the Board of Governors of the Federal Reserve System (FRS) to influence the money supply and/or interest rates. Monetary policy is relatively easy to formulate and to implement, but has less direct impact on the economy than fiscal policy. The most widely used tool of the FRS is the open market operations, in which the Fed buys or sells bonds for the Fed's account. Buying securities increases the money supply; selling securities decreases the money supply. Open market operations occur daily. Other FRS tools include adjusting the discount rate, which is the interest rate the Fed charges banks on short-term loans, and altering reserve requirements, which are the fraction of deposits that banks must maintain in cash deposits with the Fed. Reductions in the money supply signal an expansionary monetary policy; lowering reserve requirements increase the money supply, and thus, stimulate the economy. The Fed walks a fine line: expansionary monetary policy probably will lower interest rates and stimulate investment and consumption in the short run, but ultimately inflation probably will result. Feedback: The rationale of this question is to ascertain whether the student has an understanding of the basic principles of macroeconomics. 2. Discuss the National Bureau of Economic Research (NBER)'s indexes of economic indicators, and how each of the categories of these indicators might be used by the securities' analyst. The NBER has developed a set of cyclical indicators to help forecast, measure, and interpret
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This note was uploaded on 01/26/2009 for the course FBE 441 taught by Professor Callahan during the Fall '07 term at USC.

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Ch 17 Practice problem with solution - Ch 17 Practice...

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