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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

=+calculated in part (a), the prediction using new“hierarchical” Taylor rule, and the fed funds rate.
=+the weight on inflation stabilization is ¾ and the weight on output stabilization is ¼. Create a graph showing the Taylor rule prediction
=+d. Suppose Congress changes the Fed’s mandate to a hierarchical one in which inflation stabilization takes priority over output stabilization. In this context, recalculate the predicted Taylor
=+rule as a formal policy tool. How do these limitations help explain the use of nonconventional monetary policy during this period?
=+c. Based on the results from the 2008–2009 period, explain the limitations of the Taylor
=+federal funds rate averages. How well, in general, does the Taylor rule prediction fit the average federal funds rate? Briefly explain.
=+b. Create a graph that compares the predicted Taylor rule values with the actual quarterly
=+the Taylor rule. Does the Taylor rule accurately predict the current rate? Briefly comment.
=+are both ½ (see the formula in the chapter).Compare the current (quarterly average) federal funds rate to the federal funds rate prescribed by
=+a. Use the output and inflation gaps to calculate, for each quarter, the fed funds rate predicted by the Taylor rule. Assume that the weights on inflation stabilization and output stabilization
=+percentage deviation of output from the potential level of output.
=+spreadsheet. Assuming the inflation target is 2%, calculate the inflation gap and the output gap for each quarter, from 2000 until the most recent quarter of data available. Calculate the output
=+rate; for the federal funds rate, change the frequency setting to “Quarterly.” Download the data into a
=+(GDPC1), an estimate of potential GDP (GDPPOT), and the federal funds rate (DFF). For the price index, adjust the units setting to “Percent Change From Year Ago” to convert the data to the
=+2. Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), real GDP
=+challenge that monetary policymakers face in achieving the Fed’s mandate perfectly at all times?
=+c. Interpret your results. What do your response to part (a) and the data imply about the
=+b. Is the Fed currently “in violation” of its mandate?
=+in which quarters has the Fed“violated” the maximum employment mandate?
=+a. Based on this ad hoc test, in which quarters has the Fed “violated” the price stability portion of its mandate?
=+value than 0.5 for two or more consecutive quarters, consider the mandate “violated.”
=+than 1.0 for two or more consecutive quarters, and/or the average inflation gap is larger in absolute
=+following (admittedly arbitrary and ad hoc) test to the data from 2000:Q1 through the most recent data available: If the unemployment gap is larger
=+create an average inflation gap measure by taking the average of the current inflation gap and the gaps for the previous three quarters. Now apply the
=+“Quarterly.” Download the data into a spreadsheet.Calculate the unemployment gap and inflation gap for each quarter. Then, using the inflation gap,
=+the units setting to “Percent Change From Year Ago”to convert the data to the inflation rate; for the unemployment rate, change the frequency setting to
=+(UNRATE), and a measure of the natural rate of unemployment (NROU). For the price index, adjust
=+consumption expenditure price inflation. Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate
=+1. The Fed’s maximum employment mandate is generally interpreted as an attempt to achieve an unemployment rate that is as close as possible to the natural rate and inflation that is close to its
=+to use a strict interpretation of the Taylor rule as a basis for setting policy? Why or why not?
=+d. Given your answers to parts (a)–(c) above, do you think it is a good idea for monetary policymakers
=+its measure of expected inflation, then at what target should the fed funds rate be set according to the Taylor rule?
=+c. Now suppose half of Fed economists forecast inflation to be 0%, and half forecast inflation to be 14%.If the Fed uses the average of these two forecasts as
=+b. Suppose half of Fed economists forecast inflation to be 6%, and half of Fed economists forecast inflation to be 8%. If the Fed uses the average of these two forecasts as its measure of expected
=+a. If the expected inflation rate is 7%, then at what target should the fed funds rate be set according to the Taylor rule?
=+Assume that the weights on both the inflation and output gaps are ½, the equilibrium real fed funds rate is 4%, the inflation rate target is 3%, and the output gap is 2%.
=+the Taylor rule to set the fed funds rate, where the inflation gap is defined as the difference between expected inflation and the target inflation rate.
=+changes in the forecasted or expected inflation rate, rather than the current inflation rate. In light of this, suppose that monetary policymakers employ
=+25. Since monetary policy changes made through the fed funds rate occur with a lag, policymakers are usually more concerned with adjusting policy according to
=+c. The economy experiences prolonged increases in productivity growth while actual output growth is unchanged.d. Potential output declines while actual output remains unchanged.e. The Fed revises
=+23. What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios?a. Unemployment rises due to a recession.b. An oil price shock causes the
=+22. How can bank behavior and the Fed’s behavior cause money supply growth to be procyclical (rising during booms and falling during recessions)?
=+Do you agree or disagree? Explain your answer.
=+preferred to the reserve aggregates as a policy instrument.”
=+21. “Interest rates can be measured more accurately and quickly than reserve aggregates; hence an interest rate is
=+Why does control of this interest rate imply that the Fed will lose control of nonborrowed reserves?
=+19. What procedures can the Fed use to control the federal funds rate?
=+14. Why aren’t most central banks more proactive in trying to use monetary policy to eliminate asset-price bubbles?
=+Alan Greenspan, in which the nominal anchor was implicit rather than explicit?
=+11. What are the key advantages and disadvantages of the monetary strategy used by the Federal Reserve under
=+10. “Because inflation targeting focuses on achieving the inflation target, it will lead to excessive output fluctuations.” Is this statement true, false, or uncertain?Explain.
=+9. Why might inflation targeting increase support for the independence of the central bank in conducting monetary policy?
=+8. What methods have inflation-targeting central banks used to increase communication with the public and to increase the transparency of monetary policymaking?
=+with a hierarchical mandate in which price stability takes precedence.” Is this statement true, false, or uncertain?Explain.
=+5. “A central bank with a dual mandate will achieve lower unemployment in the long run than a central bank
=+Have short-term rates increased or decreased since the end of 2008?
=+2. Go to http://www.federalreserve.gov/releases/h15/update/. What is the current federal funds rate? What is the current Federal Reserve discount rate? (Define this rate as well.)
=+Now review the statements from the past two meetings. Has the stance of the committee changed?
=+committee decided to do to the federal funds rate target.
=+ Summarize this statement in one paragraph. Be sure to note what the
=+1. Go to http://www.federalreserve.gov/fomc/. This site reports activity by the FOMC. Scroll down to Calendar and click on the statement released after the most recent FOMC meeting.
=+ Comment on the Fed’s ability to control the federal funds rate during these three periods.
=+ Since 2006, what was the largest single daily miss?
=+What is the average daily miss for the period from December 16, 2008, to the most current date available?
=+What was the average daily miss between the beginning of 2008 and December 15, 2008?
=+which the rate was a range, calculate the absolute value of the “miss” as the amount by which the effective federal funds rate was above or below the range. What was the average daily miss
=+c. For each daily observation, calculate the “miss”by taking the absolute value of the difference between the effective federal funds rate and the target (use the abs(.) function). For the
=+b. When was the last time the Fed missed its target or was outside the target range? By how much did it miss?
=+ how does it compare to the effective federal funds rate?
=+a. What is the current federal funds target/range,
=+ranges (DFEDTAR, DFEDTARU, DFEDTARL) and the effective federal funds rate (DFF). Download into a spreadsheet the data from the beginning of 2006 through the most current data available.
=+2. In December 2008, the Fed switched from a point federal funds target to a range target (and it’s possible that it will switch back to a point target in the future). Go to the St. Louis
=+b. Is your answer to part (a) consistent with what you expect from the market for reserves? Why or why not?
=+a. Calculate the percent change in nonborrowed reserves and the percentage point change in the federal funds rate for the most recent month of data available and for the same month a year earlier.
=+1. Go to the St. Louis Federal Reserve FRED database, and find data on nonborrowed reserves(NONBORRES) and the federal funds rate(FEDFUNDS).
=+f. The Fed reduces reserve requirements and then offsets this action by conducting an open market sale of securities.
=+1===+e. The Fed reduces reserve requirements.
=+d. The Fed raises the interest rate on reserves above the current equilibrium federal funds rate.
=+c. The Fed raises the target federal funds rate.
=+b. Banks expect an unusually large increase in withdrawals from checking deposit accounts in the future.
=+a. The economy is surprisingly strong, leading to an increase in the amount of checkable deposits.
=+22. Using the supply and demand analysis of the market for reserves, indicate what happens to the federal funds rate, borrowed reserves, and nonborrowed reserves, holding everything else constant,
=+21. Why is it that a decrease in the discount rate does not normally lead to an increase in borrowed reserves?
=+ Use the supply and demand analysis of the market for reserves to explain your answer.
=+20. If a switch occurs from deposits into currency, what happens to the federal funds rate?
=+19. What is the main advantage and the main disadvantage of an unconditional policy commitment?
=+the basis of the following criteria: flexibility, reversibility, effectiveness, and speed of implementation.
=+15. Compare the methods of controlling the money supply—open market operations, loans to financial institutions, and changes in reserve requirements—--on
=+13. What are the disadvantages of using loans to financial institutions to prevent bank panics?
=+ Many of the assets held are longer-term securities acquired through various loan programs instituted as a result of the crisis. In this situation, how could reverse repos(matched sale–purchase
=+11. Following the global financial crisis in 2008, assets on the Federal Reserve’s balance sheet increased dramatically, from approximately $800 billion at the end of 2007 to $3 trillion by 2011.
=+c. Based on your results in parts (a) and (b), does it appear that the money supply should be increasing or decreasing?
=+b. What is the change in reserve balances since a year ago?
=+a. What is the current reserve balance?
=+Go to http://www.federalreserve.gov/Releases/h41/ and locate the most recent release. This site reports changes in factors that affect depository reserve balances.
=+ 3. An important aspect of the supply of money is reserve balances.
=+Does it appear that the Fed has been increasing or decreasing the rate of growth of the money supply? Is this consistent with your understanding of the needs of the economy? Why?
=+2. Go to http://www.federalreserve.gov/releases/h6/hist/and find the historical report of M1 and M2. Compute the growth rate of each aggregate over each of the past three years (it will be easier
=+Read the first section of the annual report, which summarizes Monetary Policy and the Economic Outlook. Write a one-page summary of this section of the report.
=+1. Go to http://www.federalreserve.gov/boarddocs/hh/ and find the most recent annual report of the Federal Reserve.

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