1. Look at this data from the Federal Reserve, showing the changes it made to th
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1. Look at this data from the Federal Reserve, showing the changes it made to the federal funds target rate in 1998 What type of monetary policy was it following? a expansionary monetary policy b contractionary monetary policy c. expansionary fiscal policy d. contractionary fiscal policy 1998 Date Increase Decrease Level(%) November 17 October 15 September 29 254.75 25 5.00 25 5.25 2 In question #2, above, the Federal Reserve was most likely responding to a. a recessionary gap b. an inflationary gap 3. The reserve requirement is 0.10. If the Federal Reserve buys $15,000,000 worth of government securities, then the maximum change in the money supply (from both the Federal Reserve and the banking system) is Show your work here 4. In question #3, above, the Federal Reserve created $15,000,000. How much can the banking system create from that initial $15,000,000 injection? S 5. How does quantitative easing differ from traditional open market operations? 6. How do banks create money?Explanation / Answer
3. Money multiplier = 1/Reserve requirement = 1/0.10 = 10
Change in Money supply = Multiplier X Monetary base = 10 X $ 15,000,000 = $ 150,000,000
5. Quantitative easing is a monetary policy tool of central bank under which central bank purchase government securities from the market to lower the rate of interest and lead to increase in the money supply. On the other hand, open market operation is the buying and selling of government securities by the central bank to affect the flow of money in the economy.
6. Banks create money from their deposits. All banks have to keep a certain portion of their deposit with the central bank which is called reserve requirement. After maintaining this reserve, banks lend the remaining deposits to the productive sector at higher interest rate in the economy while banks paid less interest on deposits made by the public. Through this process, it earns profit by the difference in the interest rate and creates money in the economy.
7. Federal reserve buys government securities to increase the flow of money in an economy. Federal reserve buys securities by paying money which injects in the economy and increases the supply of money.
8. Fed will sell government securities in the market which sucks money from the economy and lead to increase in the federal funds rate. This leads to leftward shift of supply of funds in the economy.
9. Fed will neither purchase nor sell government securities in the market to affect the market.
10. Fed will buy government securities which increases the supply of money in the economy and leads to decrease i the federal funds rate. In this case, Supply of funds curve shifts rightwards.
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