Font G Paragraph G Styles G DX 1. List and briefly explain the five tools available to the Federal Reserve System and the central banks of other developed economies to enact monetary policy. Limit the explanation of each tool to one sentence. 2. In response to the Great Recession of 2008 and to pandemic-caused recession of 2020, the US Federal Reserve System (Fed) conducted extensive Open Market Operations purchasing US government and private financial securities. These securities are assets in the Fed's balance sheet. Go to FRED to obtain Assets: Total Assets: Total Assets (Less Eliminations from Consolidation). a. Insert the graph here. b. What is the approximate value of open market purchases during the Great Recession of 2008 (increase in total assets)? c. What is the approximate value of securities purchased during the recession of 2020? d. Where did the Fed obtain the funds to purchase these securities? e. Is there a limit to the amount of securities the Fed can purchase? 3. Go to the Federal Reserve Bank of New York, System Open Market Account Holdings. a. Insert the "Domestic Securities Holding as of table here. Activate Wi Go to Settings_ ._.__.,._,_.. _ b. What is the total value of securities? c Prior to the Great Recession of 2008, the Federal Reserve purchased only US Treasury debt. Approximately what percent of the Fed's current securities holdings are not Treasury debt? (1 How do Open Market purchases affect the monetary base {money supply)? e. If the Fed purchases a nancial security from a commercial bank, the Fed pays for the security by increasing the commercial bank's deposits at the Fed, so the bank's reseryes are increased. What affect does this have on the commercial bank's ability to lend money? 4. For economic factor, insert an X in the table indicating whether it would shift the supplyr or demand curve Left {decrease} or Right [increase] in the Real Credit Market. Economic Factor Supply Supply Demand Demand (Left) (Right) (Left) (Right) Government borrows fund to finance the deficit Households increase saving Federal government increases taxes Firms borrow to increase cash holding (liquidity) Central bank purchases $2 trillion of securities New residential home purchases reach record high Firms reduce planned investment Later in the course we will be most interested in what governments and central banks can do to smooth the business cycle and promote steady economic growth. The real credit market will play an important role. The supply and demand model for the credit market is a simple - simple because there are only two endogenous variables, the cost of real credit (the real interest rate - r) the quantity of real credit (RC) - microeconomic theoretical model. The examples below are mostly drawn from the steps taken by the US Federal Reserve Bank and the US federal government in response to the pandemic-caused recession of 2020. Analyze only the effect of the given change in the Real Credit model (all else unchanged or ceteris paribus). Changes in the Real Credit market will have effects in the Goods and Services and Foreign Exchange Markets, but those effects will be considered later when we have developed the full, three-sector model. Caution: This is the theoretical model Marthinsen develops in chapter 10. Do not Google for answers because you will rarely find answers to a theoretical model. Use Marthinsen as your Activat source. Go to SeFont G Paragraph Styles 1 7 5. In the graphs below, show the shift in either demand and/or supply for real credit by drawing in a new curve. (In MS Word, use Insert/Shape, then select and draw a line.) Insert an arrow to clearly identify the shift. Below the graph, state the change, either increase, decrease, or no change in r and RC. Here is an example of a graph as given in a typical problem and with the completed graph on the right. The red arrow is sufficient to show the new equilibrium. Initial Equilibrium S S New Equilibrium D D RC RC Answer for r and RC: r decreases, RC increasesFont G Paragraph G Styles 1 4 . 1 :7 . a. The Federal Reserve purchases $2 trillion of US Treasury debt and other debt securities in the open market. H S D RC Answer for r and RC: b. In a stimulus bill, the US government increases spending by $2.6 trillion to aid households and firms. S D Activate Go to Setting5 6 RC Answer for r and RC: c. The Federal Reserve lowers the required reserve ratio to zero. S D RC Answer for r and RC:OX d. Firms borrow to increase cash (increase liquidity) that will be needed during the recession H S D RC Answer for r and RC: e. The Federal Reserve loans money directly to state and local governments S D Activa RC Go to Sont F Paragraph Styles I 6 7 . . Answer for r and RC: f. The recession ends, the federal government reduces spending and the Federal Reserve begins selling some of its Treasury debt S D RC - Answer for r and RC