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Chapter 16: Monetary Policy (page 321)
Define Monetary Policy?
Interest Rates changes
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Who are the MPC?
Refer to Table 16.2 and assume that the Fed’s reserve ratio is 10 percent and the economy is in a severe recession. Also, suppose that the commercial banks are hoarding all excess reserves (not lending them out) because they fear loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence returns. By how many percentage points does the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? What is the size of the monetary multiplier before and after the change in the reserve ratio? By how much would banks’ lending potential decline as a result of the increase in the reserve ratio?
(1) Reserve Ratio, % | (2) Checkable Deposits, \( | (3) Actual Reserves, \) | (4) Required Reserves, \( | (5) Excess Reserve, \) (3-4) | (6) Money-Creating Potential of Single Bank, \(=5 | (7) Money-Creating Potential of Banking System, \) |
10 20 25 30 | 20,000 20,000 20,000 20,000 | 5,000 5,000 5,000 5,000 | 2,000 4,000 5,000 6,000 | 3,000 1,000 0 -1,000 | 3,000 1,000 0 -1,000 | 30,000 5,000 0 -3,333 |
True or False: In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.
Suppose a bond with no expiration date has a face value of \(10,000 and annually pays \)800 in fixed interest. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the bond price at each of the interest yields shown. What generalization can you draw from the completed table?
Bond Price \( 8,000 | Interest Yield, % ________ |
______ | 8.9 |
\)10,000 $11,000 _______ | ________ ________ 6.2 |
Does the Taylor Rule put a higher weight on resolving the unemployment gap or the inflation gap? Explain.
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