Practice_Final_part_2_[1]

Practice_Final_part_2_[1] - 20 Here is some information...

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20) Here is some information about another economy: In this graph solid lines show the world the way it is, dashed lines show future possibilities. In this graph solid lines show the world the way it is, dashed lines show future possibilities. Supply Demand 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 0 25 50 75 100 125 150 175 200 Federal Funds Rate Bank Reserves (billions of dollars) Market for Bank Reserves Supply Demand 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2 2.25 2.5 2.75 3 3.25 3.5 3.75 4 Federal Funds Rate Bank Reserves (billions of dollars) Market for Bank Reserves
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In this graph, the LRAS and SRAS curve are as they are now. The solid AD curves show two different possible current scenarios. The dashed lines are future possibilities. a) What is the current federal funds rate? The supply of bank reserves? The current nominal interest rate? The current money supply? What is the long run equilibrium real GDP and the long run price level? What is potential GDP? b) Now let’s say that the Fed has determined that the inflation rate is too high. i. What are the current real GDP and the price level? ii. When the FOMC meets, it will decide to cut/raise the federal funds rate iii. They will do this by buying/selling treasury bonds iv. This will increase/decrease the supply of bank reserves v. The new equilibrium in the market for bank reserves will be: vi. Banks will then make more/less loans vii.
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