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Question 1 (10 Marks). 2 Marks each question Fed Unveils Plan to Expand Balance Sheet but Insists It's Not Q.E By Jeanna Smialek New York Times The Fed plans to buy Treasury bills, which are shorter-dated government debt, at an "initial" pace of about $60 billion from mid-October to mid-November, it announced Friday. It will then adjust both the timing and amounts of bill purchases "as necessary to maintain an ample supply of reserve balances over time." The buying will continue at least into the second quarter of 2020. New purchase amounts will be announced on the ninth business day of each month. The Fed will also continue to intervene in the market for repurchase agreements, something its New York branch began to do last month - a first since the financial crisis - as rates climbed. The Fed will keep those operations going "at least through January of next year," according to the release, "to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities." Markets expected the Fed to do something to prevent money market turmoil after September's troubles. The Fed's chair, Jerome H. Powell, said just this week that a plan was coming "soon." But the size of the package surprised some onlookers, including Priya Misra, head of global rates strategy at TD Securities. "This is building a buffer, and it's doing it faster than I thought," Ms. Misra said. While the amount could change, buying $60 billion in Treasury bills over a month is substanti even by the Fed's standards. For context, the Fed bought about $85 billion in bonds each mor during its final round of quantitative easing, which started in 2012. Yet the new purchases different from those post crisis packages. "It's not a change in our policy stance," the president of the Federal Reserve Bank of Minneap Neel Kashkari, said in an interview Friday. The amount of bills the Fed buys "is going to de on how much demand for dollars grows," he said, and the adjustable approach to buying" us a lot of flexibility." The simple fact that policymakers are trying to draw the distinction is important, becau worked to a large extent through market expectations - investors saw it as a sign that would not lift interest rates soon. That caused them to dial back their expectation ncreases and helped to keep money cheap and easy to borrow. g. 2 far, getting to a point where reserves which no longer move around the system as easily as they once did were insufficient to smooth over turbulence. Now, the key is to get back to a place where reserves are plentiful, all the while hewing to the refrain Mr. Powell has now aired several times: "This is not Q.E." Requirements Answer the following questions, 150 to 200 words per question (Front size 12; line spacing 1) 1. Explain, the Quantitative easing process. 2 Marks 2. Explain why Powell has aired several times: "This is not Q.E." 2 Marks 3. Explain the difference between fiscal policy and monetary policy. (General case) 2 Marks 4.Based on the article, indicate if the implemented macroeconomic policy was contractionary or expansionary. Justify your answer. 2 Marks 5. Based on the article describe the channels and illustrate graphically how the implemented policy exerts its effect on GDP and labor market. 2 Marks To rive home the point that here is no broader policy signal this time, officials made the new package look unique. The Fed is buying only Treasury bills, for one thing. The Fed's recession-era buying focused on bonds, in a bid to make mortgages and car loans cheaper by pushing down longer-term interest rates. By concentrating this effort on short-term debt, the Fed is forgoing that sort of stimulus. Officials also announced the package between their scheduled meetings, whereas easing rounds were announced at policy-setting gatherings. Still, some onlookers were skeptical that the Fed would manage to convince investors that this was not an attempt to bolster the economy, given the size of the purchases. "When it swims like a duck and quacks like a duck, it's hard to prove your intentions aren't fowi," Paul Ashworth, chief economist at Capital Economics, wrote in research note. It is important that the Fed's message sticks. The Fed will be short on room to cut interest rates when the next recession hits, because they are already at just 2 percent leaving the central bank with far less than the five percentage points of cuts it made in the 2007 to 2009 downturn. That means bond buying will be an essential part of the Fed's future easing packages, and one to be used in case of emergency. But if central bankers communicate clumsily, they could create problems for themselves. They are telling investors that their bond purchases do not stimulate the economy yet they will probably need investors to believe that Fed bond buying is stimulative come the next recession. "I see some tensions there," Ms. Rosner said. The Fed did not have a lot of time to come up with this plan: Last month's market volatility was bad, and unexpected, news for the central bank. Rates on repurchase agreements, or repos, shot higher, starting September 16 as a confluence of events sucked dollars out of the financial system. A deadline for corporate tax payments and issuance of new Treasury debt led to a dollar shortage - stresses that were unusual but not unexpected. The disruption spilled over into other money markets, temporarily pushing the Fed's policy interest rate, the fed funds rate, above the range policymakers had set for it. That raised alarm bells. Officials had decided this year that they wanted to continue settir interest rates in what they called an "ample reserve" framework. In such an approach, the cent bank keeps its balance sheet holdings big enough to leave plenty of cash in the financial syste Banks keep their extra cash on deposit at the central bank, and the Fed adjusts interest rate- changing how it pays on those excess holdings, commonly called reserves. The Fed wanted to shrink its balance sheet to a point where it could run the system wi regularly intervening in markets. September's repo issues suggested that it might have go Dg. 3 Question 1 (10 Marks). 2 Marks each question Fed Unveils Plan to Expand Balance Sheet but Insists It's Not Q.E By Jeanna Smialek New York Times The Fed plans to buy Treasury bills, which are shorter-dated government debt, at an "initial" pace of about $60 billion from mid-October to mid-November, it announced Friday. It will then adjust both the timing and amounts of bill purchases "as necessary to maintain an ample supply of reserve balances over time." The buying will continue at least into the second quarter of 2020. New purchase amounts will be announced on the ninth business day of each month. The Fed will also continue to intervene in the market for repurchase agreements, something its New York branch began to do last month - a first since the financial crisis - as rates climbed. The Fed will keep those operations going "at least through January of next year," according to the release, "to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities." Markets expected the Fed to do something to prevent money market turmoil after September's troubles. The Fed's chair, Jerome H. Powell, said just this week that a plan was coming "soon." But the size of the package surprised some onlookers, including Priya Misra, head of global rates strategy at TD Securities. "This is building a buffer, and it's doing it faster than I thought," Ms. Misra said. While the amount could change, buying $60 billion in Treasury bills over a month is substanti even by the Fed's standards. For context, the Fed bought about $85 billion in bonds each mor during its final round of quantitative easing, which started in 2012. Yet the new purchases different from those post crisis packages. "It's not a change in our policy stance," the president of the Federal Reserve Bank of Minneap Neel Kashkari, said in an interview Friday. The amount of bills the Fed buys "is going to de on how much demand for dollars grows," he said, and the adjustable approach to buying" us a lot of flexibility." The simple fact that policymakers are trying to draw the distinction is important, becau worked to a large extent through market expectations - investors saw it as a sign that would not lift interest rates soon. That caused them to dial back their expectation ncreases and helped to keep money cheap and easy to borrow. g. 2 far, getting to a point where reserves which no longer move around the system as easily as they once did were insufficient to smooth over turbulence. Now, the key is to get back to a place where reserves are plentiful, all the while hewing to the refrain Mr. Powell has now aired several times: "This is not Q.E." Requirements Answer the following questions, 150 to 200 words per question (Front size 12; line spacing 1) 1. Explain, the Quantitative easing process. 2 Marks 2. Explain why Powell has aired several times: "This is not Q.E." 2 Marks 3. Explain the difference between fiscal policy and monetary policy. (General case) 2 Marks 4.Based on the article, indicate if the implemented macroeconomic policy was contractionary or expansionary. Justify your answer. 2 Marks 5. Based on the article describe the channels and illustrate graphically how the implemented policy exerts its effect on GDP and labor market. 2 Marks To rive home the point that here is no broader policy signal this time, officials made the new package look unique. The Fed is buying only Treasury bills, for one thing. The Fed's recession-era buying focused on bonds, in a bid to make mortgages and car loans cheaper by pushing down longer-term interest rates. By concentrating this effort on short-term debt, the Fed is forgoing that sort of stimulus. Officials also announced the package between their scheduled meetings, whereas easing rounds were announced at policy-setting gatherings. Still, some onlookers were skeptical that the Fed would manage to convince investors that this was not an attempt to bolster the economy, given the size of the purchases. "When it swims like a duck and quacks like a duck, it's hard to prove your intentions aren't fowi," Paul Ashworth, chief economist at Capital Economics, wrote in research note. It is important that the Fed's message sticks. The Fed will be short on room to cut interest rates when the next recession hits, because they are already at just 2 percent leaving the central bank with far less than the five percentage points of cuts it made in the 2007 to 2009 downturn. That means bond buying will be an essential part of the Fed's future easing packages, and one to be used in case of emergency. But if central bankers communicate clumsily, they could create problems for themselves. They are telling investors that their bond purchases do not stimulate the economy yet they will probably need investors to believe that Fed bond buying is stimulative come the next recession. "I see some tensions there," Ms. Rosner said. The Fed did not have a lot of time to come up with this plan: Last month's market volatility was bad, and unexpected, news for the central bank. Rates on repurchase agreements, or repos, shot higher, starting September 16 as a confluence of events sucked dollars out of the financial system. A deadline for corporate tax payments and issuance of new Treasury debt led to a dollar shortage - stresses that were unusual but not unexpected. The disruption spilled over into other money markets, temporarily pushing the Fed's policy interest rate, the fed funds rate, above the range policymakers had set for it. That raised alarm bells. Officials had decided this year that they wanted to continue settir interest rates in what they called an "ample reserve" framework. In such an approach, the cent bank keeps its balance sheet holdings big enough to leave plenty of cash in the financial syste Banks keep their extra cash on deposit at the central bank, and the Fed adjusts interest rate- changing how it pays on those excess holdings, commonly called reserves. The Fed wanted to shrink its balance sheet to a point where it could run the system wi regularly intervening in markets. September's repo issues suggested that it might have go Dg. 3