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(Graph on the last page) Pretend you are in charge of conducting monetary policy at the New York Fed and you have the following initial conditions. Initial Conditions rr/D = .10 C = 600 billion D = 1200 billion ER = 0 M = C + D Given the above information (show all work on your exam sheet): i) Calculate the MB. ii) Calculate the money multiplier (mm). iii) What is the money supply (use MS = mm x MB)? 10. If Rd = 300 - 40 iff, given the information above, what is the market clearing federal funds rate? Assume that this is the target for the federal funds rate. Show all work. NOTE: To calculate the market clearing
i = 4.5 In the space on your exam sheet, draw a reserve market diagram depicting exactly what is going on here! Label the equilibrium point as point A. 11. Suppose that due to whatever reason, reserve demand changes and you forecast the reserve demand to now be Rd = 260 - 40 iff. In order to keep the federal funds rate at target, what must the open market desk do? Be specific and show this development in your picture on your exam sheet (label the new equilibrium as point B). Rd = 260 –40i we have to keep i at 4.5. So put i = 4.5 in Rd So Rd = 260 –40*4.5 = 80 We should to decrease the reserves. Keep the needed reserves unchanged at 120, we can sell securities inorder to decrease the reserves. This decrease = 120 –80 = 40 12. Suppose the alternative, that the open market desk does nothing different, that is, they hold the amount of reserves constant. What happens in the reserve market? What is the market clearing fed funds rate now? Label this development, that is, the new equilibrium as point C. Be sure to show all work. Take R = 120 R= 260 –40i = 120 i = 3.5