Eco exam

Problem Set 4

ECON 3 − Principles of Macroeconomics

University of California San Diego

Christopher Gibson

Friday, May 1st

1. (a) What is the “dual mandate” of the Federal Reserve of the United States?

https://www.federalreserve.gov/faqs/money_12848.htm

(b) What are some of the priorities of other central banks? Looking on their websites,

identify the goals of each of the following central banks.

i. The Bank of England

ii. The Bank of Canada

iii. The European Central Bank

(c) Are any of the above more or less similar to the Fed’s dual mandate?

(d) San Diego is in Federal Reserve district twelve.

i. Where is the Federal Reserve Bank that supports the twelfth district?

ii. Which other states are located (partially or wholly) in the twelfth district?

2. Suppose the money supply is $2.25 trillion dollars and the reserve ratio is 10%. As a

result of economic trends the, Federal Reserve decides it wants to increase the money

supply to $2.5 trillion.

(a) If the Fed is increasing the money supply, which of their dual mandate are they

exercising?

(b) What open market operation will the Fed undertake to inject money into the econ-

omy?

(c) If banks hold no excess reserves, what value of bonds will the Fed buy/sell to increase

the money supply to $2.5 trillion?

1

(d) Suppose that as a result of economic conditions, banks actually hold 25% of deposits

in reserves, so that the effective reserve ratio is 25%, not 10%. Knowing this, what

value of bonds will the Fed buy/sell to increase the money supply from $2.25 trillion

to $2.5 trillion?

(e) As a result of the open market operation in (d), banks no longer feel the need to

hold so many excess reserves, so they now hold only 15% of deposits in reserves,

making the effective reserve ratio 15%. Since the Fed implemented monetary policy

in (d) under the assumption of a 25% reserve ratio, what value of bonds will the Fed

buy/sell to bring the money supply back to $2.5 trillion?

(f) If it knew the effective reserve ratio would be 15% upon implementing monetary

policy, what value of bonds would the Fed buy/sell to increase the money supply

from $2.25 trillion to $2.5 trillion? Does this match the difference between your

answers in (d) and (e)?

2