Question

1. If the economy is currently operating at potential GDP, an open market purchase of government securities by the Federal Reserve Board will put upward pressure on prices.

   True

   False

QUESTION 15

1. Assume that the bank currently has excess reserves of zero, and the required reserve ratio is 20%.  If the Fed sells $120 million of government securities to JeffCo Bank, the amount of loans that the bank can make decreases initially  by _______ million. Be exact.  

QUESTION 16

1. Use the Taylor Rule to find the federal funds rate (FFR).

   Assume that the Fed has a target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should they set if the current inflation rate is 2% and GDP is currently growing at 3%?  

   Answer: _____%

QUESTION 17

1. Use the Taylor Rule to find the federal funds rate (FFR).

   Assume that the Fed has a target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should they set if the current inflation rate is 2% and GDP is currently growing at 1%?  

   Answer: _____%  

QUESTION 18

1. Use the Taylor Rule to find the federal funds rate (FFR).

   Assume that the Fed has a target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should they set if the current inflation rate is 5% and GDP is currently growing at 1%?   This is an example of stagflation where the economy experiences inflation with slow growth.

   Answer: _____%

Answer 1

ans a)

true

open market purchase of govt securities by federal reserve board will lead to payment in terms of money for purchase and money supply economy increases and rate of interest decreases , investment increases, agregate demand increases but as economy is at potential level of GDP, so output can't increase but AD has increased as compared to AS, this will put upward pressure on price.

ans 15

if fed sells securities to jeffco bank worth $120 million, and Jeff co will pay $120 billion to fed and his deposits will $120 million

if govt securities not have purchased , out of this $120 million, after keeping reserves of 20% of $120 billion = $24 milion , intial loan of $120-24= 96 million must have been given

initial loan will decrease by $96 million

ans 16

according to Taylor rule,

FFR, r = r* + p + 0.5( p-p* ) +0.5(y-y*)

r= Fund rate

r* is target fund rate = usually taken as 2%

p= inflation rate

p*= targeted inflation rate

y= growth rate

y* = targeted groeth rate

r= 2 + 2+ 0.5(2-2) +0.5(3-3)

r= 4%

ans 17

FFR, r = r* + p + 0.5( p-p* ) +0.5(y-y*)

r= 2 + 2+ 0.5(2-2) +0.5(1-3)

r= 4- 1= 3%

ans 18

FFR, r = r* + p + 0.5( p-p* ) +0.5(y-y*)

r= 2 + 5+ 0.5(5-2) +0.5(1-3)

r= 7+ 1.5- 1= 7.5