Money and Banking Essay Portion

Instructions:

· Answer each question

1. In “Low Interest Rates,” Stanley Fischer outlines several reasons why we might be concerned about a persistently low natural rate of interest. (250 words)

a. Define the natural rate of interest

b. Explain how it is used in monetary policy

c. Discuss the reasons why Fischer is concerned that it has been persistently low

2. In “Where the Newly Created Money Went,” David Price explains the concerns that some economists in the Federal Reserve have about the volume of excess reserves that were created in response to the financial crisis. (250 words)

a. What is the issue of high excess reserves? What could go wrong in the economy because the monetary base was increased so dramatically?

b. Should we be concerned about inflation resulting from such a large increase in the monetary base?

3. Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and find the most recent values for the M1 Money Stock (M1SL) and the St. Louis Adjusted Monetary Base (AMBSL).

a. Using these data, calculate the value of the money multiplier

b. Assuming that the multiplier is equal to the value computed in part (a), if the monetary base increases by $400 million, by how much will the money supply increase?

c. Is this consistent with what you would have expected? Explain