Lecture Series

After watching the Federalreserve video, briefly answer the following questions:

a.How was the Fed’s response to the crisis in keeping with the historical role of central banks?How was it different?
b.What other authorities were involved in responding to the crisis?
c.What were the stress tests and what were their effects?
d.How many loans did the Fed make during the financial crisis?How many defaulted?
e.What is LSAP or QE and how did the affect the recovery?
f.In what ways has the Fed increased transparency in recent years?

2. Assume that the Fed purchases a security for $500,000 from FirstBank. Also assume that the reserve ratio is 0.2 (20%).
FirstBank lends its excess reserves to Betty, who does her banking at SecondBank.
SecondBank lends its excess reserves to Charlie, who does his banking at ThirdBank.
ThirdBank lends its excess reserves to Donna, who does her banking at FourthBank.
Assume a simple money creation model, with no cash drain, no time deposits, and banks desire to hold no excess reserves.
How does the open market purchase affect the final T-accounts for FirstBank, SecondBank and ThirdBank? What is the total increase in deposits that results from the initial change in reserves?

3. Assume a model where the currency ratio is 0.2 (c = 0.2), the excess reserve ratio is 0.2 (e = 0.2), and the required reserve ratio is 0.2 (r = 0.2). What is the money multiplier? What change in the money supply results from an open market sale of $200,000?

4. Using the model of the market for reserves presented in Class 15, please show how the Fed can use open market operations to maintain the target for the federal funds rate. (HINT: In Microsoft Word, you can use the drawing toolbar to create lines to draw graphs.)

5. This question asks you to read the statement from the latest FOMC meeting.

After reading the statement, answer the following questions:

a. How does the FOMC view the current state of the economy?

b. What does the FOMC forecast for the future of the economy?

c. What is the target for the federal funds rate? What is the discount rate?

d.What policy tools are mentioned in the statement?

e.Was the vote unanimous?

6.In the IS/LM model, what are the effects of an increase in the money supply? Show graphically and explain. When is monetary policy more effective, when the LM curve is relatively flat, or when the LM curve is relatively steep? Explain.

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