Download chapters 13 – 15 review part 2

CHAPTERS 13 – 15 REVIEW PART 2 I. The Federal Reserve has three primary tools to expand or contract the money supply. A. List the three tools. B. Which tool does the Fed use most often? C. Explain why the Federal Reserve uses the tool you indicated in I.B. II. What is the basic objective of monetary policy? State the cause effect chain through which monetary policy is made effective. What are the major strengths and weaknesses of monetary policy? III.Banks can borrow reserves at either the federal funds rate or at the discount rate. A. Define the federal funds rate. B. Define the discount rate. C. Under what conditions would banks borrow at the discount rate? IV. Suppose the Federal Reserve decides to engage in a tight money policy as a way to reduce demand pull inflation. Use the aggregate demand aggregate supply model to show what this policy is intended to accomplish in a closed economy. Now introduce the open economy and explain how changes in the international value of the dollar might affect the location of your aggregate demand curve. V. How do each of the following metaphors apply to the Federal Reserve’s role in the economy? A. Fed as a mechanic B. Fed as a warrior C. Fed as a fall guy FISCALL + MONETA
O
ARY POLICY
O
Grap
ph each of thee following situations usiing AS/AD, Loanable Fun
nds and Moneey Market graphs. VI. Su
uppose the eeconomy is exxperiencing rising unemp
ployment, slo
owing increaases in real G
GDP and mod
dest in
nflation…Thee Federal Resserve decidess to follow an
n expansionaary policy. A Describe w
A.
what this poliicy might incclude. B. If the policy is effectivee, explain thee short‐run efffect it would
d have on eacch of the follo
owing: 1. Interestt rates 2. Investm
ment 3. GDP/Ou
utput 4. Price Leevel 5. Employ
yment I. The Federal R
Reserve Board of Governo
ors determin
nes that it is ccurrently app
propriate to ffollow a conttractionary olicy. po
A Start the grraph (pt. A) iin the positio
A.
on that would
d inspire thee Board of Go
overnors to d
do such a thin
ng. B. Would the monetary po
olicy be to in
ncrease or deecrease the m
money supply
y? Explain. he policy the Federal Resserve is likely
y to take, and
d explain how
w its action aachieves the ggoal of C. Describe th
following aa contraction
nary policy. E
Explain how tthe policy wo
ould affect eaach of the folllowing: 1. Interestt rates 2. Investm
ment 3. Output vel 4. Price lev
5. Employ
yment uppose the eeconomy is cu
urrently grap
phed to the rright and the II. Su
Feederal Reserrve decides to
o implementt expansionary monetary
y po
olicy to redu
uce the unem
mployment raate. A Explain thee short‐run eeffect of the eexpansionary
A.
y policy on eaach of the follo
owing: 1. Real intterest rates 2. Output vel 3. Price lev
4. Employ
yment B. Explain thee long‐run efffect of the exxpansionary policy on each of the follo
owing (hint: iin this second
d shift, how w
would the change in p
price level afffect the business sector?) 1. Output 2. Price yment 3. Employ
4. Real intterest rates VII.
The unemployment rate is 10% and the CPI is increasing at a 2% rate. The federal government cuts personal income taxes and increases spending. The Fed buys bonds on the open market. What happens to GDPR, PL, unemployment, interest rates and Ig? Explain. VIII.
The unemployment rate is 6% and the CPI is increasing at a 9% rate. The federal government raises personal income taxes and cuts spending. The Federal Reserve sells bonds on the open market. What happens to GDPR, PL, unemployment, interest rates and Ig? Explain. IX. The unemployment rate is 6% and the CPI is increasing at a 5% rate. The federal government cuts personal income taxes and maintains current spending. The Fed sells bonds on the open market. What happens to GDPR, PL, unemployment, interest rates and Ig? Explain.