Question Details

(solution) Chapter 10

1. What are the three tools of the Federal Reserve? Also, explain how each can be used to increase the money supply. 2. What are the two reasons that the Federal Reserve acts as a "lender of last resort?" 3. Write a balance sheet for the Federal Reserve and list possible items on both sides. Do not worry about recording actual dollar figures. 4. Assume that the money supply increases from $1.5 trillion to $1.6 trillion. Give at least one explanation which could have caused this increase. Any one of the following would be acceptable answers: 5. What are the Fed's largest held asset and liability? Discuss the nature of each. 6. Explain how the Federal Reserve can increase or decrease the money supply through the manipulation of reserves. 7. Assume the following balance sheet for the Federal Reserve and the commercial banks with a required reserve ratio of 10%. Suppose the Fed wishes to expand the money supply by reducing the ratio to 5%. Draw a new balance sheet for the commercial banks and explain the changes. All figures are in billions of dollars 8. Explain the discount rate. 9. Assume the following balance sheet for the Federal Reserve and commercial banks. If the required reserve ratio is 10% and the commercial banks borrow and additional $100 billion show the effect on the balance sheet of the commercial banks and the Federal Reserve. Explain the impact on the money supply. 10. Explain why the discount rate cannot be used to control the money supply with great precision. 11. Discuss the process of open market operations. 12. Comment on the following statement. “The Treasury is able to print money to finance the deficit.” 13. Explain what people mean when they say that some of the debt the government owes it owes to itself. 14. Explain what would happen to the money supply if the Federal Reserve made an open market sale of $5 million worth of securities to a private citizen. Assume that the bank with which the private citizen has an account is all "loaned up", has reserves of $20 million, deposits of $100 million and must follow a required reserve ratio of 20%. 15. Explain why open market operations are the Fed's preferred means of controlling the money supply. 16. Assume the banking system has $100 billion in demand deposits and $10 billion in reserves. In addition, assume that the required reserve ratio is 5%. Answer the following questions: a. How much excess reserves are in this system? b. What is the value of the money multiplier? c. What is the maximum amount of change in demand deposit creation that could take place if the banking system lent out all of its excess reserves. 17. Assume the Fed sets the supply of money independent of the interest rate. Draw a graph of the supply of money with the interest rate on the vertical axis and the supply of money on the horizontal axis. 18. Assume that the Federal Reserve pursues a monetary policy that is directly related to the interest rate. Furthermore, assume that the Fed will still supply a positive amount of money even at an interest rate of zero. Draw a money supply curve that is consistent with these two conditions. 19. Assume the Fed must increase the money supply. Explain three ways that it may be able to accomplish this objective. 20. Provide three reasons why open market operations are the Federal Reserve’s preferred menas of controlling the money supply. 21. Summarize the effect of an open market purchase of securities by the Fed. 22. Summarize the effect of an open market sale of securities by the Fed. 23. Explain what a vertical money supply curve suggests about the relationship between the money supply and the interest rate. 24. Apart from the major functions of the Fed are there other duties assigned to it? Explain.


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Sep 13, 2020





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