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Chapter 16: Monetary Policy (page 321)
What are the components affected in a contractionary monetary policy?
C, I, (X-M)
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Which of the following Fed actions will increase bank lending?
Select one or moreanswers from the choices shown.
a. The Fed raises the discount rate from 5 percent to 6 percent.
b. The Fed raises the reserve ratio from 10 percent to 11 percent.
c. The Fed lowers the discount rate from 4 percent to 2 percent.
d. The Fed sells bonds to commercial banks.
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 |
Does the Taylor Rule put a higher weight on resolving the unemployment gap or the inflation gap? Explain.
When bond prices go up, interest rates go _______.
a. up
b. down
c. nowhere
Suppose that actual inflation is 3 percentage points, the Fed’s inflation target is 2 percentage points, and unemployment is 1 percent below the Fed’s unemployment target. According to the Taylor rule, what value will the Fed want to set for its targeted interest rate?
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