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9 - Banking Homework Unit 9:Conceptual Problems Suppose the...

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Banking Homework: Unit 9 Conceptual Problems : Suppose the demand for reserves became less stable. How would monetary policy be affected ? It would become more difficult for the central bank to determine the supply of reserves required to achieve the target federal funds rate. The rate would become more volatile and monetary policy will become less effective . Economists believe that central banks should be as transparent as possible, allowing the public to accurately forecast changes in interest policy. Explain the justification for this belief. What would happen if policymakers constantly surprised the public ? If policymakers constantly surprised the public, they would be undermining their goal of financial stability . The ECB pays a market-based interest rate on required reserves and a lower rate on excess reserves. Explain why the system is structured this way . Paying a market-based interest rate on required reserves reduces the costs to banks of holding reserves.
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