Look at this data from the Federal Reserve showing the changes it made to the fe
ID: 1209000 • Letter: L
Question
Look at this data from the Federal Reserve showing the changes it made to the federal funds target rate m 1998 What type of monetary policy was it folowing? expansionary monetary policy contractionary monetary policy expansionary fiscal policy contractionary fiscal policy In question #2 above the Federal Reserve was most likely responding to: a recessionary gap an inflationary gap 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: 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? $__________How does quantitative easing differ from traditional open market operations? How do banks create money?Explanation / Answer
1. Option B is correct.
The Fed is using contractionary monetary policy because the rate of interests are declining from september to november and this is possible through reducing the money supply of the economy.
2. Option A is correct.
With a reduction in interest rates the Fed is trying to boost the private investments which are inversely related to the interest rates. With this the output and GDP would increase and the recessionary gap would be eliminated.
3. Multiplier = 1/required reserve.
Multiplier = 1/0.10 = 10
Money supply = multiplier*change in reserves.
Money supply = 10*15,000,000 = $150,000,000.
4. If the $15,000,000 is injected into the banking system, the banks wouldbe required to keep 10% of the amount as reserves and would lend the rest excess reserves as loans.
excess reserves = 10% of 15,000,000 = 1,500,000
Money supply = multiplier*change in reserves
money supply = 10*1,500,000 = $15,000,000.
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