Question Two [Total 28 marks]

(a) The current Fed Fund Target Rate is close to 0%. Explain the effectiveness of expansionary monetary policy under the current situation, (6 marks)

(b) Suggest solutions to government in order to get out from the current situation. (4 marks)

(c) Suppose the current federal funds market rate is higher than the federal funds target rate. With the aid of correctly-labelled diagram of the Market for Reserve, show how the following three policy tools could be used to match the two rates together.

i. Open Market Operation (4 marks)

ii. Discount Policy (4 marks)

iii. Reserve Requirements (4 marks)

(d) Compare the use of open market operations, discounting, and changes in reserve requirements to control the money supply. (6 marks)