However you should be comfortable graphing the monetary base graph and the

However you should be comfortable graphing the

This preview shows page 7 - 10 out of 10 pages.

However you should be comfortable graphing the monetary base graph and the money supply graph from this question. A graphed solution is shown below so you can check your work. Here the graph of the Monetary Base is on the left and the graph of the Money Supply on the right. Point A shows the conditions that prevailed in part a), point B shows the conditions that prevailed in part b), point C shows the conditions that prevailed in part C) and finally point D shows the conditions that prevailed in part D). Note that interest rates (the variable on the vertical axis) aren’t labeled, since there are none in this problem.
Table for Individual Question Feedback Points Earned: 4.0/4.0 Correct Answer(s):A 13.We are going back to the fall of 1998, back in the 'midst' of the new economy. The U.S. economy weathered the E. Asian quite well and the U.S. economy, by almost all accounts, was performing brilliantly. In August of 1998, Russia defaulted on all the debt held by foreign investors. This "shock" rattled financial markets so much that the Fed went into action and lowered short term interest rates 3 times in a seven week period. In whatfollows, we are going to model this 7 weeks period using our new acquired reserve demand / reserve supply diagram.Here are the relevant dates and interest rates:Point A: August 1998: iff= 5.5%Point B: September 1998: Lowered interest rates to iff=5.25%Point C: October 1998: Lowered interest rates to iff= 5.00%Point D: November 1998: Lowered interest rates to iff= 4.75%Note importantly, we are modeling the behavior of the federal funds rate during this period. The forecasted reserve demand at this time is given below. For simplicity, this reserve demand function is stable (constant) throughout this exercise:Rd= 900 - 100 iff

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture