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Chapter 16: Q.12 (page 369)

Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all of its policy instruments except interest on reserves, what should the Fed do with its policy tools?

Short Answer

Expert verified

The Fed should open market operations, change reserve ratios, discount rate changes etc.

Step by step solution

01

introduction

Fed can utilize the arrangement instruments of the open market tasks, changes in the hold proportion and the given markdown rate change.

02

explanation

By expanding the loan fees, the banks need to keep more cash with the government bank to bring in higher cash. The government would raise markdown rates ultimately prompting a low cash supply in the economy.

Open market activities incorporate the buy and the offer of U.S. government protections in an open market and with the given high inflation in an economy, Fed would decide to sell its securities which would help in decreasing the cash supply.

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Most popular questions from this chapter

Imagine working at the Trading Desk at the New York Fed. Explain whether you would conduct open market purchases or sales in response to each of the following events. Justify your recommendation.

a. The latest FOMC Directive calls for an increase in the target value of the federal funds rate.

b. For a reason unrelated to monetary policy, the Fed's Board of Governors has decided to raise the differential between the discount rate and the federal funds rate. Nevertheless, the FOMC Directive calls for maintaining the present federal funds rate target.

Evaluate how expansionary and contractionary monetary policy actions affect equilibrium real GDP and the price level in the short run.

Suppose that the Fed implements each of the policy changes you discussed in Problem 16-12. Now explain how the net export effect resulting from these monetary policy actions will reinforce their effects that operate through interest rate changes.

Suppose that the economy currently is in long-run equilibrium. Explain the short- and long-run adjustments that will take place in an aggregate demand-aggregate supply diagram if the Fed expands the quantity of money in circulation.

Why do you suppose that corporate cash holdings have decreased slightly since 2015?
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