Download ECN 111 PRINCIPLES OF MACROECONOMICS CHAPTER 15

ECN 111
PRINCIPLES OF MACROECONOMICS
CHAPTER 15 PRACTICE PROBLEMS
This is NOT a homework assignment.
It is just practice to help you become familiar with the Chapter 15 material.
There is no homework for Chapter 15, but this material will be on the Final.
1. (a) List the two intermediate monetary targets that the Federal Reserve can choose from.
(b) Explain why the Fed has to use intermediate targets. For example, why can’t the Fed just
directly use its tools in order to achieve its goals?
(c) Which of these two variables is the Federal Reserve currently using as its intermediate target?
(HINT: What do you hear on television? “Today the Fed lowered….”)
2. I really don’t want you to get confused between these two very important interest rates in the
United States economy.
(a) What is the federal funds interest rate?
(b) What is the discount window interest rate?
3. Describe how the Federal Reserve uses open market operations in order to “target” or change
short-term interest rates.
4. The principal method used by the Federal Reserve to change the money supply is open-market
operations. Use the simple (static) AD-LRAS-SRAS model to graphically illustrate the impact
in the short-run and in the long-run of a Federal Reserve decision to increase open-market
purchases of treasury securities. Describe in words the economic behavior that occurs as the
economy adjusts from the original equilibrium (point A) to the short-run equilibrium (point B),
and from the short-run equilibrium to the new long-run general equilibrium (point C).
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5. Suppose you are an economist working for the Federal Reserve when severe droughts in the
southeast U.S. and floods in the midwest U.S. substantially reduce food production in the United
States. Use the simple (static) AD-LRAS-SRAS model to graphically illustrate your policy
recommendation to accommodate this adverse supply shock, assuming that your top priority is
maintaining full-employment and reaching potential GDP in the economy. Describe in words
the economic behavior that occurs as the economy adjusts from the original equilibrium (point
A) to the short-run equilibrium (point B), and from the short-run equilibrium to the new long-run
general equilibrium (point C).
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