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Chapter 16: Q.2 For Critical Thinking (page 366)

If the FOMC were to aim to attain targets for M1 or M2 instead of the federal funds rate, would people be as concerned with trying to anticipate future federal funds rate changes? Explain.

Short Answer

Expert verified

If the FOMC were to aim to attain targets for M1 or M2 instead of the federal funds rate, the federal funds rate will hold its position.

Step by step solution

01

introduction 

At the point when a strategy is to such an extent that individuals expect it by utilizing all suitable data, then, at that point, the approach becomes ineffectual. Monetary specialists utilize all suitable data as a base to shape their assumptions.

02

explanation part (a)

The soul of the objective assumptions theory is that individuals structure assumptions and attempt to frame them amazing precisely. Individuals structure assumptions regarding various things and, for this, they utilize all suitable data.

03

explanation part (b)

Government finances rates are something individuals are worried about, in light of the fact that they utilize this data for their future activities according to their expectations. This is the rate at which the Fed loans to banks and hence it remembers data-based assumptions regarding the loaning circumstance for the country.

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Most popular questions from this chapter

Suppose that following adjustment to the events in Problem 16-8, the Fed cuts the money supply in half. How does the price level now compare with its value before the income velocity and the money supply change?

Take a look at Figure 16-6. Suppose that a multiple reduction in GDP is the final outcome that the Fed desires in the last box in the figure. Explain the required directions of efforts - that increases or decreases - that most occur in the preceding boxes in the figure in order to yield in this desired decrease in real GDP

Why might the fact that private economic forecasters compete to sell their services help to constrain behavioural tendencies for too much optimism in projections of real GDP growth? Explain your reasoning.

Assume that the following conditions exist :

a. All banks are fully loaned up - there are no excess reserves, and desired excess reserves are always zero.

b. The money multiplier is 3.

c. The planned investment schedule is such that at a 6percent rate of interest, the investment is \(1200billion; at 5 percent, investment is \)1225billion

d. The investment multiplier is 3.

e. The initial equilibrium level of real GDP is \(18trillion.

f. The equilibrium rate of interest is 6percent.

Now the Fed engages in expansionary monetary policy. It buys \)1billion worth of bonds, which increases the money supply, which in turn lowers the market rate of interest by 1percentage point. Determine how much money supply must have increased, and then trace out the numerical consequences of the associated reduction in interest rates on all the other variables mentioned.

Assume that the following conditions exist :

a. All banks are fully loaned up - there are no excess reserves, and desired excess reserves are always zero.

b. The money multiplier is 4.

c. The planned investment schedule is such that at a 4percent rate of interest, investment is \(1400billion. At 5percent, investment is \)1380billion.

d. The investment multiplier is 5.

e. The initial equilibrium level of real GDP is \(19trillion.

f. The equilibrium rate of interest is 4percent.

Now the Fed engages in contractionary monetary policy. It sells \)2billion worth of bonds, which reduces the money supply, which in turn raises the market rate of interest by 1 percentage point. Determine how much the money supply must have decreased, and then trace out numerical consequences of the associated increase in interest rates on all other variables mentioned.
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