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Money, Banking and The Fed Macro-Problem | Economics Assignment

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Added on  2019-10-18

Money, Banking and The Fed Macro-Problem | Economics Assignment

   Added on 2019-10-18

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Department of EconomicsCollege of Arts and SciencesFairfield UniversityIntroduction to EconomicsMoney, Banking and The Fed Macro-Problem 2 (Part 2)Due Date:_______________Directions: Your answers to questions 1-6 must be placed on these three pages. Please type youranswers to question 7 and the Bonus Problem and staple together with pages 1-3. If more thanone person prepared the answers to this part of Macro-Problem 2, write your name in the blankabove.The Board of Governors of Hatboro have provided the following solutions to Hatboro’seconomic problem. Evaluate each proposal and then choose the one that would be the mosteffective at reducing the level of inflation.Option 1: The Reserve Requirement1.Governor Gummo suggests raising the Reserve Requirement from 10% to 70 %. If thisstep was taken, using the Reserve formula, (a)how will this affect MegaBank Reserves? _______________________________
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(b) how will this affect the money supply? ________________________________Option 2: Discount Rate2.Governor Harpo suggests raising the Discount Rate from 2% to 3%. MegaBank couldthen borrow money from the Central Bank and raise the interest rate on future loans toits customers. For example, the mortgage loan rate would rise from 6% to 7%. __________________________________________________________________________ __________________________________________________________________________ Option 3: Open Market Operations (Circle the correct choice for the following questions.)3.Governor Chico suggests that the Central Bank use its Open Market Operations tool for monetary policy. He recommends that the Central Bank slow the growth of the money supply. He recommends a(n) expansionary / contractionary policy to be effective in reducing inflation. The CB should buy / sell $50 million in government securities (but keep the reserve requirement at 10 percent. After the sale, the MegaBank would have
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more dollars / fewer dollars of required reserves and more dollars / fewer dollars of excess reserves. As a result of this transaction, MegaBank’s ability to create additional money with reserves / loans would most likely increase/ decrease. Thus the rate of growth of the money supply would most likely speed up / slow down. Option 4: Alternative Policy4.Governor Groucho is the richest man in Hatboro. He is willing to contribute his personalfortune to save Hatboro. Groucho could withdraw $5 million from his checking accountand bury it in his backyard. (He owns MegaBank and is its largest depositor.)How willthis affect the loanable funds for MegaBank and the money supply? ____________________________________________________________________ ____________________________________________________________________ Option 5 Another Alternative5.Governor Zeppo believes the answer to inflation is to use a “two-fisted” approach. Heproposes flooding the market with T-bills to raise the yield equal to the rate of inflation.Then to add stricter controls on loan able funds, he would raise and maintain the IOER Rate at 200 basis points above the rate of inflation. Thus, as inflation comes down, theinterest on IOER would decrease as well.
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6.Analyze Governor Zeppo’s proposal. Investor Lydia has a one-year $10,000 HatboroTreasury Bond that pays 6% on face value and has a yield of 6 %.a.What price did she pay for the bond? _________________________b.Due to inflation, the CB floods the T-Bond market by selling T-Bonds. The CB wants to raise the interest rate to 18%. What will be the new price of the bond? ________________________c.Lydia can hold this bond to maturity at the end of this year (Dec.)one year orsell it now (April)at the new, lower price. What would you advise her to do?Why (Consider the inflation rate!)?______________________________________________________ ______________________________________________________ ______________________________________________________ 7.Choose the best solution recommended by Gummo, Groucho, Harpo, Chico or Zeppo.Describe fully the effect of this policy on the money supply and economic growth.Include a graph of the money supply as well as AD/AS to support your answer.Also, provide a new balance sheet for MegaBank to show this change.
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