9 - how the Open Market Trading Desk would implement a...

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Unit 9 - Monetary Policy: Using Interest Rates to Stabilize the Domestic Economy 9-1 Unit 9 Monetary Policy: Using Interest Rates to Stabilize the Domestic Economy Conceptual Problem 1 Suppose the demand for reserves became less stable. How would monetary policy be affected? Conceptual Problem 2 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? Conceptual Problem 3 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. Analytical Problem 1 Suppose the demand for reserves is stable. Use a graph of the market for Bank Reserves to show
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Unformatted text preview: how the Open Market Trading Desk would implement a decision by the FOMC to raise the target federal funds rate. You should assume that the 100 basis point spread between the discount rate and the target federal funds rate is maintained. Analytical Problem 2 Consider a situation where reserve requirements were binding and the Federal Reserve decided to reduce the requirements. Use the graph of the Market for Bank Reserves to illustrate how the Open Market Trading Desk would react to this change assuming the demand for excess reserves remains unchanged. Analytical Problem 3 Use the following Taylor rule to calculate what would happen to the real interest rate if inflation increased by 3 percentage points. Target federal funds rate = 2½ + current inflation + ½(inflation gap) +½(output gap)...
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