4 ECONOMICS CALCULATIONS DUE 10HRS FROM NOW

ECO 230-01/02

FALL 2018 Due: November 26

PROBLEM SET NUMBER NINE

1. Suppose banks do not hold excess reserves and the public does not hold cash. For each of the following monetary policies, compute the change in money supply. Show your calculation steps and explain.

a. The Fed makes $4000 open market purchase. The required reserve ratio is 20%.

b. The Fed calls in $600 discount loans and the required reserve ratio is 10%.

c. The Fed sells $300 worth of bonds to banks. The required reserve ratio is 50%.

d. The Fed lowers the required reserve ratio from 10% to 1%. There are $5 million in bank reserves.

2. Go to the following web site and then click the statement on November 7-8 to read the latest statement of the FOMC meeting:

http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

a. How does the Fed characterize the current state of the economy?

b. Was there any change in the target interest rate (the federal funds rate)?

c. Was the vote unanimous?

3. Show the effects of the following events on the aggregate demand curve in U.S. economy. Please use a separate graph for each case.

a. The U.S. dollar appreciates.

b. The U.S. government reduces income tax.

c. The Fed makes an open market sale.

4. (BONUS QUESTION) Suppose the current required reserve ratio is 10% and currently money supply is $200 million. The Federal Reserve wants to raise the money supply from $200 million to $500 million. Propose THREE monetary policies that the Fed can use to achieve this goal. (Be specific. For example, how much worth of bonds should be purchased/sold by the Fed? How many discount loans should be made/called in? By how much should the Fed raise/lower the required reserve ratio?)