08 - Answers to End-of-Chapter Questions Chapter 8 1....

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± Answers to End-of-Chapter Questions –Chapter 8 1. Disagree. Some unemployment is beneficial to the economy because the availability of vacant jobs makes it more likely that a worker will find the right job and that the employer will find the right worker for the job. 2. The goal of price stability often conflicts with the goal of high economic growth and employment and interest-rate stability. When the economy is expanding along with employment, inflation may rise. In order to pursue the goal of price stability the Fed may have to pursue contractionary anti- inflationary policy that conflicts with the goal of high employment and economic growth. Similarly when the central bank wants to pursue tight monetary policy and raise interest rates in order to contain inflation, this pursuit of the goal of price stability may conflict with the goal of interest-rate stability. 3. True: In such a world hitting a nonborrowed reserves target would mean that the Fed would also hit its interest rate target, or vice versa. Thus the Fed could pursue both a nonborrowed reserves target and an interest rate target at the same time. 4. a. The three-month Treasury bill rate can be thought of as either an operating target or an intermediate target. It can be an operating target because it is a variable that can be affected directly by the tools of the Fed (open market operations, in particular). It can be an intermediate target because it has some direct effect on economic activity. b. The monetary base is an operating target because it can be directly affected by the tools of the Fed and is only linked to economic activity through its effect on the money supply. c. M1 is an intermediate target because it is not directly affected by the tools of the Fed and has some direct effect on economic activity. 5. The Fed can control the interest rate on three-month Treasury bills by buying and selling them in the open market. When the bill rate rises above the target level, the Fed would buy bills, which would bid up their price and lower the interest rate to its target level. Similarly, when the bill rate falls below the
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08 - Answers to End-of-Chapter Questions Chapter 8 1....

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