AnsQues.Chapt.14.16.17 - l:€.gn:—_e.=u-n.r.a u u-—...

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Unformatted text preview: l:€.gn:—_e..=u.---n_...... .... . .- .r- -.a u... u.-.-.-—-... . Chapter 14: Exchange Rates and the International Monetary System 201 PART HI: OPE CONOMY MACROECONOMICS CHAPTER EXCHANGE RATES AND THE INTERNATIONAL MONETARY SYSTEM CHAPTER OVERVIEW In this chapter, the analysis is extended to open economies. The first questions considered are those of measurement. Economic relations between the United States and other nations are discussed with reference to the US. balance of payments accounts. The foreign exchange market is described and the ways in which the exchange rate is determined under a fixed rate system, a flexible rate system, and a managed floating rate system are analyzed. The next section of the chapter discuSSes the relationships between intemational economic relations and the level of domestic economic activity. The question of the effect that changes in the level of domestic economic activity will have on the balance of payments is also considered. Potential conflicts between domestic policy goals and g0als of external balance under a fixed exchange rate are examined. The relationship between capital flows and the level of economic activity is explained. The final section of the chapter discusses the relative merits of fixed versus flexible exchange rate regimes. Proposals for a retum to a fixed exchange rate system are considered. #5" ANSWERS TO QUESTIONS IN CHAPTER 14 I. In the balance of payments accounts, each time an expenditure is recorded as a debit the source of financing for that expenditure is counted as a credit. As in other applications of double~entry bookkeeping, by definition, credits and debits will be equal. 2. a. Under a fixed exchange rate system, a par value is Set for a given currency. The country's central bank then intervenes by buying or selling foreign eXChange to maintain or "peg" that rate. b. In a flexible exchange rate system, the exchange rate must move to the value that equates the supply of and demand for foreign exchange. c. In a managed or "dirty" float regime, the exchange is, at times, allowed to adjust to clear the foreign exchange market as in a flexible rate system. But central banks periodically intervene to prevent what are viewed as undesirable movements in exchange rates. 3. In a fixed exchange rate system, a fall in the demand for a country’s exports would cause the supply of fOreign exchange schedule (in a graph such as Figure 14.1) to shift to the left. At the fixed exchange rate, a balance of payments deficit would arise. With a flexible exchange rate system, again the supply of foreign eXChange schedule would shift to the left, creating an excess demand for foreign 202 Chapter 14: Exchange Rates and the International Monetary System 10. exchange at the initial exchange rate. The exchange rate would rise to clear the foreign exchange market. There would be no balance of payments deficit. If central banks did not intervene in foreign exchange markets, the exchange rate would move to equate supply and demand. There would be no balance of payments deficits in the sense of the official reserve transactions account. The Bretton Woods system was a system of fixed exchange rates. The US. dollar was fixed in price both relative to other currencies and gold. Other currencies were convertible into dollars, but not gold. The IMF was set up to supervise this international monetary system, which was initiated at the end of World War II. ' As the level of economic activity increases, the level of imports, which is a function of income, will rise. The level of exports, which depends on the level of foreign income, will be unchanged. Therefore, the trade balance will worsen. This creates a potential conflict between the goals of internal and extemal balance because for domestic reasons (to lower unemployment, for example) it might be desirable to expand the economy, but such an expansion might create a balance of payments deficit. An expansionary monetary policy would increase the level of economic activity, which would worsen the trade balance and IOWer the domestic interest rate, which would worsen the balance on the capital account. An expansionary fiscal policy would increase the level of domestic economic activity, which would also Women the trade balance, but would increase the domestic interest rate, which would improve the balance on the capital account. In a fixed exchange rate system, there are potential conflicts between domestic and external goals. For example, an expansionary monetary policy, which might be desirable from a domestic standpoint, might result in an unacceptable balance of payments deficit. In a flexible exchange rate system, the exchange rate will move to clear the foreign exchange market and remove this type of conflict. It should be noted, however, this presumes that the policymaker is indifferent about the level of the exchange rate, which might not always be the case. If the exehange rate is viewed as a policy goal, then conflicts between domestic and external goals may exist in the flexible exchange rate case as well. Advantages of a flexible exchange rate system that Were discussed in the text were those of freeing domestic policy instruments from a balance of payments constraint and insulating the domestic economy from foreign shocks to aggregate demand. Advocates of a fixed exchange rate system argue that such a system provides a more stable environment for world trade and investment. Proponents of fixed exchange rates are also concerned that Speculation on currency values might cause exchange rates to fluctuate excessively in a flexible exchange rate system. Some advocates of a fixed exchange rate system believe the discipline that the balance of payments constraint places on policymakers will have a beneficial anti-inflationary effect. An expansionary monetary policy in a foreign country would cause the domestic supply of foreign exchange schedule to shift to the right as the foreign interest rate fell, leading to a capital inflow for the domestic economy, and the foreign level of income and the price level rose, stimulating exports to that foreign country. The demand schedule for foreign exchange will shift to the left due to the rise in the foreign price level and fall in the foreign interest rate. At a given exchange rate, and, therefore, in Chapter 14: Exchange Rates and the Intemational Monetary System 203 the fixed exchange rate case, a balance of payments surplus would result. In a flexible exchange rate system, the exchange rate would fall to re-equilibrate the foreign exehange market. ADDITIONAL QUESTIONS Multiple-Choice Questions: 1. The current account in a nation’s balance of payments accounts includes a. exports of US. computers b. imports of German automobiles. c. private and government transfer payments made between the United States and other countries. d. Both a and b * e. All of the above 2. Within a system of perfectly flexible exchange rates, an increase in the United States demand for imports would result in a a. rise in the exchange rate. b. fall in the exchange rate. c. balance of payments deficit. d. balance of payments surplus. 3. The current international monetary system is best described as a fixed rate system. completely flexible rate system. gold standard. managed floating rate system. mercantilist system. 99-957!“ 4. An advantage of a flexible exchange rate system relative to a fixed system is that in a flexible rate system a. currency speculation will be reduced. * b. balance of payments surpluses and deficits will be self-correcting. c. inflation will be minimized by the "discipline of the balance of payments." d. the price of imported goods will be kept relatively low. . 5. One explanation for the fall in the value of the U.S. dollar over the 1976-79 period is a. the mix of an expansionary fiscal/tight monetary policy over the period. b. the high US. interest rates during the period. c. a higher degree of accommodation of supply shocks in the United States relative to our trading partners. d. the disintegration of the Bretton Woods system during these years. 204 Chapter 14: Exchange Rates and the International Monetary System 6. In a system of perfectly flexible exchange rates, an expansionary U.S. monetary policy will cause a. a rise in the value of the dollar relative to foreign currencies. * b. a fall in the value of the dollar relative to foreign currencies. e. no change in the value of the dollar relative to foreign currencies. d. a change in the value of the dollar relative to foreign currencies but the direction of the change is uncertain. 7. Imports of goods and services totaled a. 2.5 percent of GDP in 1960 and increased to 15 percent of GDP by 1994. b. 3.9 percent of GDP in 1960 and have declined since then. * c. 4.4 percent of GDP in 1960 and had increaSed to just over 12 percent of GDP by 1994. d. 4 percent of GDP in 1960 and have only increased to 4.9 percent as of 1994. 8. The US. foreign exchange rate describes the a. balance of payments. * b. dollar price of a foreign exchange. c. merchandise trade balance. (1. law of comparative advantage. 9. An appreciation of the dollar implies * a. a fall in the exchange rate. b. a rise in the exchange rate. c. no change in the exohange rate. d. a currency crisis. 10. Capital inflows in the balance of payments accounts include * a. purchasos of US. government bonds by foreigners. b. purchases of financial assets by US residents. c. direct investments in foreign countries. (1. indirect investments in foreign countries. 11. A current account deficit in a nation's balance of payments accounts implies that a. imports are equal to exports. ‘ b. exports exceed imports. * c. expenditures are more than income. d. income is more than expenditures. 12. A demand for foreign exchange occurs in the United States when * a. a US. citizen wants to purchase stock on the London stock exchange. b. the United States exports steel to Japan. c. Japanese citizens visit the United States. d. All of the above 13. A decline in the exchange rate means that a. the price of foreign exchange has declined. b. foreign currency has appreciated while the dollar has depreciated. c. foreign currency has depreciated while the dollar has appreciated. * d. Either a_ or g Chapter 16: Money News 225 ‘ \ / \‘ / K i t. PART IV: ECONOMIC POLICY 5\ . a” \u/ CHAPTER E: THE MONEY SUPPLY PROCESS /" In this chapter and later in Chapter 1;, monetary policy is discussed in more detail. In this chapter, the tools that the Federal Reserve uses to conduct monetary policy are described. The way in which these tools influence the money stock is examined. The question of the relative roles of the Federal Reserve, banking sector, and non-bank public in determining the level of the money stock is considered. The first section of the chapter deals briefly with the institutional structure of the Federal Reserve. Then, the tools that the Federal Reserve uses to control the level of bank reServes (open market operations, changes in the discount rate and changes in required reserve ratios on deposits) are explained. The next section considers the relationship between changes in bank reserves, the level of bank deposits, and the money supply. This is done first under a number of simplifying but restrictive assumptions, and then for more general cases. The concepts of the money multiplier and the money supply function are explained. The last section considers the question of "who controls the money stock?" It is argued that uncertainty about the money multiplier creates difiiculties for month to month control of the money stock by the Federal Reserve. For somewhat longer periods, the Federal Reserve should be able to ofi'set undesired changes in the money multiplier by counterbalancing adjustments in the monetary base. In practice, however, since the Federal Reserve at times had other financial goal variables, most importantly interest rate targets, the money stock has not always been closely controlled, even over such longer periods. The question of money stock versus interest rate control is returned to in Chapter 17. ® ANSWERS TO QUESTIONS IN CHAPTER 15' l. The two major policymaking bodies within the Federal Reserve System are the Board of Governors of the Federal Reserve and the Federal Open Market Committee. The Board of Governors is composed of 7 governors appointed by the President to 14-year terms. One of the governors is appointed by the President as Chairman of the Board of Governors for a 4—year term. The Open Market Committee is made up of the 7 members of the Board of Governors and 5 of the presidents of the regional Federal Reserve banks. The presidents of the 12 regional banks serve on the Open Market Committee on a rotating basis with the exception that the president of the Federal Reserve Bank of New York is a permanent member. The Open Market Committee supervises Federal Reserve Open Market Operations via its directive to the Open Market Desk in New York. The members of the Board of Governors, in addition to their function as members of the Open Market Committee, control the level of the discount rate and the level of reserve requirements. They have many regulatory functions as well. . .‘.'.. e'r..;m.~‘.—.;.n.;....a;.-...-w._=.s.._- . _ . c . . . le 226 Chapter 16: Money Supply Process 2. To increase bank reserves, the Federal Reserve could a. buy securities in the Open Market. They pay for the securities with a check drawn on the New York Federal Reserve Bank. Once the check clears through a commercial bank, the reserves of the banking system increase by the amount of the Open Market purchase. b. lower the Federal Reserve discount rate. If the Federal Reserve lowered the discount rate, which is the rate they charge banks that borrow resches, it would encourage bank borrowing and borrowed reserves would rise. Another expansionary action that the Federal Reserve could take would be to lower the required reserve ratio on deposits. While this would not change the leVel of reserves, it would increase the volume of deposits that could be supported by a given level of reserves. 0 3. The maximum increase in deposits is ch the required reserve ratio is 0.1. Initially, suppose a commercial bank, as a result of an expansionary action by the Federal Reserve, has $1,000 more in reserves. Excess reserves could be loaned out or used to purchase securities. These actions will, in turn, cause deposits at other banks that increase both required and excess reserves at those banks. Again, excess reserves will be converted to loans and securities. With the simplifying assumptions 2' made in the text, eventually all the new reserves must end up as required reserves on demand it deposits, so deposits will increase by the maximum [(1/rrd)AR, or $10,000 in this case]. The actual increase might fall short of the maximum if: currency holdings of the public rise, banks i: , increaSc their demand for excess reserves, or the public increases its‘holdings of time and saving deposits (if there are required reserve ratios for these deposits which have been eliminated in the United States). 17.5: .s ~.. ~_ 4. Suppose that the Federal Reserve sells the security to an individual who pays with a check drawn on a commercial bank. Once the check clears through the Federal Reserve system, that bank's deposits at a Federal Reserve bank and, hence, its reserves will have declined by $1,000. Deposits will also be down by $1,000 that will reduce required reserves by $100. Still, the bank must reduce its outstanding deposit liabilities by more or obtain more reserves, since reserves are down $1,000 and desired excess reserves are unchanged. Suppose the bank sells a security worth $900 to bring reserves to the new required level. The buyer of the security will pay with a check drawn on another commercial bank. This will lower that bank’s reserves by $900, restore the first bank’s required reserves, and lower the second bank's deposits by $900. Thus, the second bank will have $90 fewer required reserves but must obtain $810 in new reserves to meet reserve requirements. This process of deposit contraction ($1,000 + $900 + . . .) isjust the opposite of the process of deposit creation discussed in the text. With the simplifying assumptions made, a new equilibrium will be reached when deposits have fallen by $10,000 and reserves are $1,000 lower [AD = (1/rrd) x AR]. 3‘» ' 5. The money multiplier gives the increase in the money stock, M1 for example, per unit increase in the monetary base. The level of the money multiplier depends on the portion of the increase in the. . monetary base that ultimately becomes bank reserves. This is determined primarily by the public's . desired currency to deposit ratio. The other factors that determine the size of the money multiplier concern the quantity of deposits that a given increase in reserves will support. This will depend on the level of the required reserve ratio on deposits and, in the case of the M1 multiplier, on the Chapter 16: Money Supply Process 227 proportion of the increase in deposits that consists of deposit categories in M1 (it also depends on the level of excess reserves held by banks). 6. The effect of each of these monetary policy changes comes via an effect on the money stock and, therefore, on the position of the LM schedule: a. an increase in the required reserve ratio for demand deposits will lower the money stock, shifi the LM schedule up, increase the interest rate, and reduce income. b. an open market sale of securities will also lower the money stock, increase the interest rate, and reduce income. c. A decrease in the discount rate will increase the money stock, lower the interest rate, and increase income. 7. Essentially, money stock control over very short periods is made difficult by unpredictable changes in the money multiplier. Also, due to changes in bank borrowing of reserves, even the base is difficult to control on a month to month basis. Over the longer mn, the Federal Reserve can offset undesired changes in borrowed reserves or the money multiplier with appropriate Open Market operations to hit targeted average rates of growth in the money stock. 8. To see the conflict between hitting a target level for the money stock, and at the same time, hitting an interest rate targcn'consider the case where there is an unpredicted shifi in the money demand . function. The money supply is set at the target level that we will assume to be consistent with the target level of the interest rate giVen the Federal Reserve's prediction of the IeVel of money demand. Now suppose that the shock to the money demand function increases money demand for given levels of income and the interest rate. If the Federal Reserve leaves the money stock unchanged to achieve the money stock target, the LM schedule will shifi to the left and the interest rate will rise above the target level for that variable. If, instead, once the shifi in the money demand function is recognized by the monetary authority, the money stock is increased in order to maintain the original position of the LM schedule and, therefore, of the interest rate, the money stock target will be missed. ADDITIONAL QUESTIONS Multiple-Choice Questions: 1. A Federal Reserve purchase of government securities in the open market will a. lower the level of income and the interest rate. b. lower the level of income and raise the interest rate. * c. raise the level of income and lower the interest rate. d. raiSe the level of income and raise the interest rate. 228 Chapter 16: Money Supply Process 2. If the Federal Reserve simultaneously buys government bonds in the Open market and raises reserve requirements, the i a. money supply will increasc. b. money supply will decrease. c. money supply will stay the same. * d. two tools will work against one another and the net effect on the money supply is uncertain. 3. If the Federal ReserVe purchases $5 million in government securities in the open market, with a 20 percent required reserve ratio on deposits, the maximum increase in deposits would be a. $5 million. b. $10 million. * c. $25 million. d. $1 million. 4. The most important of the tools used by the Federal Reserve to control bank reserVes is a. open market operations. b. changes in the discount rate. c. changes in tax rates on commercial banks. d. changes in legal required reserve ratios. * ‘l 5. If commercial banks hold demand deposits of $100,000, reserves of $30,000, and the required reserve ratio is 20 percent, what is the maximum additional amount by which the banking system can expand the money supply? a. $20,000 b. $30,000 * c. $50,000 d. $60,000 _e. $120,000 ems—«r;- H. : —g—~.‘ A ~ - , ~.‘LI?.-_~r.v.»n “:3... ‘ 6. Raising the Federal Rescrve discount rate will z a. expand the money supply and lower interest rates. 1, i b. expand the money supply and raise interest rates. ' * c contract the money supply and raise interest rates. d. contract the money supply and Iowa interest rates. e. None of the above , most restrictive monetary policy action on the part of the Federal ReserVe? 3;“ a. Sell government securities, raise reserve requirements, and lower the discount rate r. b. Buy government securities, raise reServe requirements, and raise the discount rate c. Sell government securities, lower reserve requirements, and raise the discount rate * d. Sell government securities, raise reserve requirements, and raise the discount rate II 7 ill, ' 7. Assuming each policy is performed with the same magnitude, which of the following would be the u. 8. Ajoint fiscal and monetary policy program to reduce inflation might include a a. tax cut and reduction in the required reserve ratio on demand deposits. «_1 * b. tax increase and a sale of Securities in the open market. "" c. cut in government spending and a purchase of government securities in the open market. (1. cut in government spending and a reduction in the discount rate. Chapter 16: Money Supply Process 229 9. An increase in the legal required reserve ratio would be expected to a. reduce bank reserves. * b. reduce the money supply. 1:. increase the money supply. d. leave both bank reserves and the money supply unchanged. 10. Ifthe Federal Reserve were to simultaneously sell government bonds in the open market and raise the discount rate, the a. money supply will increase. * b. money supply will decline. c. money stock will stay the same. d. two tools will work in Opposite directions and the effect on the money supply is uncertain. ll. Ifthe required reserve ratio on deposits is 0.2 and the public’s currency holdings are constant, then a SO-unit open market purchase of bonds by the Federal Reserve will a. increase the money supply by 50 units. * b. increase the money supply by 250 units. c. decrease the money supply by 50 units. d. decrease the money supply by 250 units. 12. A fall in which of the following would increase the money multiplier? a. The monetary baSe * b. Public's desired currency to checkable deposit ratio c. The level of Federal Rescrve Open market purchases d. Ml e. All of the above 13. If the Federal Reserve lowers the legal reserve requirement on deposits, a. the monetary base will rise. * b. the money stock will rise. c. both the monetary base and the money stock will rise. d. neither the monetary base nor the money stock will rise. 14. If the Federal Reserve raises the discount rate, the market rate of interest (r) a. will rise but the monetary base will be unchanged. * b. will rise and the monetary base will fall. c. and the monetary base will both rise. d. will fall and the monetary base will rise. 15. The US. system of central banking was established in a. 1925. b. 1910. * c. 1913. d. 1970. e. None of the above Chapter 17: Monetary Policy 241 & CHAPTER l‘X: MONETARY POLICY CHAPTER OVERVIEW The chapter begins with a brief discussion of the institutional setting for monetary policy. The degree of independence of the Federal ReServe is considered. Then the question of optimum monetary policy is examined. The question of the optimum strategy of monetary policy leads to a discussion of intermediate targeting on a monetary aggregate. The arguments for and against such a monetary policy strategy are presented. Alternatives to intermediate targeting on monetary aggregates are examined. The central focus is on the relative merits of monetary aggregates versus interest rates as intermediate targets for monetary policy. The choice is shown to depend on the sources of uncertainty facing the monetary policymaker, though some other considerations also come into play. The chapter concludes with a section on the evolution of Federal Reserve policy since 1970. ANSWERS TO QUESTIONS IN CHAPTER I. The Federal Open Market Committee (FOMC) is composed of the seven members of the Board of Governors of the Federal ReserVe System and 5 of the 12 presidents of the regional Federal Reserve Banks, who serve on a rotating basis. The committee oversces the conduct of open market operations (purchases and sales of government securities in the open market). Such Open market operations are the main tool by which the Federal Reserve controls bank reserves. 2. The analyses in the text indicated that a monetary aggregate was the preferred intermediate target when the predominant sources of uncertainty were shocks to the real sector (IS shOcks). Use of a monetary aggregate as an intermediate target also limits the possibility of monetary accommodation of inflation. .If, however, shocks to money demand (LM shocks are the predominant source of uncertainty), the interest rate, not a monetary aggregate, is the preferred intermediate target. Use of an interest rate target is also likely to produce stability of interest rates in the short run that may contribute to stability in financial markets. Interest rates are also subject to fewer measurement problems than monetary aggregates. eten'nining the eve] of econom c ctivity. In their view, stabilizing money growth around a target will go a long way toward stabil mg the economy. at. The analysis of the effects of instability in money demand on the desirability of intermediate targeting on money can center on Figure 17.4. There it is shown that shifts in the LM schedule displace income from the target level even if the money stock target is hit. In this case, holding the interest rate constant would be a preferable policy. ’I, . 242 Chapter 17: Monetary Policy 6‘}. «is In October 1979, the Federal Reserve shifted from control of the Federal funds rate to control of bank reserves. The Federal Reserve took this action to gain more precise control over monetary aggregates. In 1979, inflation was accelerating and the predominant source of uncertainty was the strength of private sector demand. In this situation, a monetary aggregate is the preferred intermediate target. ' The advantage of using a financial market variable such as a monetary aggregate or interest rate (which provide information about movements in inflation and output) as an intermediate target is that these variables can be observed more quickly than can the alternative policy objectives. A dr0p in investment will shift the IS curve to the lefl. If the Federal Reserve maintains the initial , interest rate income will fall by the full amount of the horizontal shifi in the curve. If the money supply is the target, the interest rate will fall and investment will be somewhat revived (we move down a positively leped LM curve). The fall in income will, therefore, be smaller if the monetary aggregate is the intermediate target. As applied to monetary policy, the time inconsistency problem arises in the following way. Suppose that the situation is one where due to some distortion in the economy social welfare would be increased if output were pushed above the natural rate. Also, assume that wages and prices are set at less frequent intervals than monetary policy decisions. At one point, say the beginning of the year, the policymaker might announce a noninflationary rate of monetary growth. But later, afier wages and prices are Set, the policymaker will find it optimal to renege on this commitment. Firms and workers, knowing the policymaker’s preferences, will anticipate that the policymaker will cheat. There will be no output gain, only higher inflation. The time inconsistency problem causes an inflationary bias in monetary policy. As the relationship between different measures of the money supply with nominal GDP have broken dowu, many countries have moved to targeting interest rates and inflation. ADDITIONAL QUESTIONS Mulfiplehoice Questions: I. * The case for intermediate targeting on» a monetary aggregate would be strengthened if there a. was a decline in the interest elasticity of money demand. b. was increased instability in the money demand function. e. was an increase in the severity of supply shocks. d. were difficulties in the measurement of money demand. 2. The FOMC meets approximately eight times per year and at these meetings they a. review the current domestic situation. b. review international economic circumstances. c. consider forecasts of the Federal ReserVe staff with respect to future economic events. d. All of the above e . None of the above . ~_A~.A . . . -..4‘ Chapter 17: Monetary Policy 243 3. Relative to fiscal policy, monetary policy * a. is much more independent of the political process. b. has fewer harmful side effects. . c. requires much more time to implement. d. is more closely controlled by Congress. 4. In October of 1979, the Federal Reserve changed its operating procedure fi-om control of bank reserves to control of the Federal fimds rate. control _of the Federal funds rate to control of bank reserves. "pegging" the eXchange rate to intermediate targeting on monetary aggregates. intermediate targeting on monetary aggregates to control of the Federal funds rate. '* 9-957!” 5. The best case for intermediate targeting on monetary aggregates is where the a. LM schedule is flat and the money demand function is stable. b. IS schedule is flat and the level of investment is stable. * c. LM schedule is steep and the money demand function is stable. d. IS Schedule is steep and the money demand function is stable. 6. An advantage of the use of an interest rate target is that this operating procedure is likely to provide a. stability in the money growth rate. b. stability in the monetary base. * c. stability of short-term interest rates. d. an end to procyclical movements in the money stock. 7. If the great majority of shocks to our system arise from unpredictable shocks to money demand, the preferred tactic of monetary policy is targeting 3. reserves. * b. interest rates. 'c. M2. d. reserves plus currency. 8. The Chairman of the Board of GOVernors a. is appointed for a four~year term but his term is not concurrent with that of the President of the United States. b. is the dominant figure on the Federal Open Market Committee. c. is appointed for life. * d. Bothgandl; 244 Chapter 17: Monetary Policy 9. With a monetary aggregate as an intermediate target, the implicit assumption in Federal ReServe strategy is that a. higher rates of growth in the money stock will, ceteris paribus, increase inflation while lowering unemployment in the short run. ‘ b. SIOWer rates of growth in the money stock will, ceteris paribus, lower inflation rates and increase unemployment in the short run. c. higher rates of growth in the money stock will, ceteris paribus, decreasc both inflation and unemployment in the short run. d. slower rates of growth in the money stock will, ceteris paribus, increase both inflation and unemployment in the short run. * e. Both a and h . 10. Assume that the Federal Reserve replaces the money stock with the interest rate as an intermediate 5 target. Then, a. the range for the target interest rate would be chosen to hit the inflation rate, unemployment rate, 'r and growth rate of the economy. b. if the Treasury bill rate fell temporarily below the target range, the Open Market Desk would sell securities in the open market until the Treasury bill rate rose to the target range. c. if the Treasury bill rate rose above the target range, the Open Market Desk would purchase Treasury bills or other government securities. * d. All of the above 11. Which of the following options are available to the Federal Reserve if it wants to change the money stock? It can a. change the marginal income tax rate. b. engage in open market operations. . c. change the required reserve ratio. * d. Both 12 and g 12. Which of the following statements is (are) correct? Regardless of whether the LM curve is vertical or upward SIOping, * a. a money stock target is superior to an interest rate target when the uncertainty facing the policymaker concerns the IS schedule. b. an interest rate target is always superior to a money stock target when the uncertainty facing the policymaker c0ncerns the IS schedule. 0. both a money stock target or interest rate target provide the same results when the uncertainty facing the policymaker concerns the IS schedule. d. a money stock target is never superior to an interest rate target when the uncertainty facing the policymaker concerns the IS schedule. 13. Assuming a money supply target, then a positive shock to money demand a. will not shift the position of the LM schedule away from the predicted level even if the target level of the money supply is achieved. ‘ * b. will shift the position of the LM schedule away from the predicted level even if the target level of the money supply is achieved. c. may or may not shift the position of the LM schedule away from the predicted level even if the target level of the money supply is achieved. d. None of the above ...
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This note was uploaded on 06/16/2011 for the course ECON 420 taught by Professor Na during the Summer '11 term at University of North Carolina School of the Arts.

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AnsQues.Chapt.14.16.17 - l:€.gn:—_e.=u-n.r.a u u-—...

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