Question 2.

a) We talked at length about why the Fed wanted so desperately wanted the authority to pay interest on reserves.Explain exactly why the Fed wanted this authority so badly. Comment on when the Fed got this authority and what they did after they got this authority.Please be as specific as possible and be sure to mention the Fed's balance sheet as well as the term sterilization in your essay.

Suppose we have the following money market conditions:

RR/D= .10

C = 400

D = 500

ER = 0 (zero)

b)i) Calculate the MB.

ii) Calculate the money multiplier.

iii) What is the money supply (use mm x MB to calculate this)?

Show work

Now the Fed injects, via open market purchases, 450 in excess reserves. We consider two cases:

CASE #1 - the new money market conditions are as follows:

RR/D= .10

C = 800

D = 1000

ER = 0 (zero)

c)i) Calculate the MB.

ii) Calculate the money multiplier.

iii) What is the money supply (use mm x MB to calculate this)?

CASE #2- the new money market conditions are as follows:

RR/D= .10

C = 400

D = 500

ER = 450

d)i) Calculate the MB.

ii) Calculate the money multiplier.

iii) What is the money supply (use mm x MB to calculate this)?

e) Now compare the % in the money supply from its original value to its value in Case #1 to the % in the money supply from its original value to its value in Case #2.Explain why your answers are so different being sure to relate this difference to your answer in part a) above.

f) Considering only Case #1, economists would sound an alarm and be worried about the Fed failing miserably on one half of the dual mandate.What part of the dual mandate would economists be most concerned about and why?Use the quantity theory of money and Milton Friedman's famous quote to support your answer.