TEST PRE QUESTIONS 1-4

QUESTION 1

Pretend you are in charge of conducting monetary policy at the New York Fed and you have the following initial conditions.

Initial Conditions

rr/D = .10

C = 500 billion

D = 900 billion

ER = 0

M = C + D

Given the above information (show all work on your exam sheet):

i) Calculate the MB.

ii) Calculate the money multiplier (mm).

iii) What is the money supply (use MS = mm x MB)?

QUESTION 2

If Rd= 200 - 40 iff, given the information above, what is the market clearing federal funds rate? Assume that this is the target for the federal funds rate. Show all work.NOTE: To calculate the market clearing federal funds rate, you first need Rs. Rsis made up of required reserves and excess reserves. Here ER=0 so to find Rs, take the value for rr/D and multiply it by the value for D. Then you will be able to solve for the market clearing federal funds rate.

In the space on your exam sheet, draw a reserve market diagram depicting exactly what is going on here! Label the equilibrium point as point A.

NOTE: This work is to be done using theExam Sheet 2 Part 2 B.You will upload this work, along with other work to be done on this sheet, to question #12 on this exam.Enter the word "Finished" into the text-box below when ready to move on.

QUESTION 3

Suppose that due to whatever reason, reserve demand changes and you forecast the reserve demand to now be Rd= 260 - 40 iff. In order to keep the federal funds rate at target, what must the open market desk do? Be specific and show this development in your picture on your exam sheet (label the new equilibrium as point B).

NOTE: This work is to be done using theExam Sheet 2 Part 2 B.You will upload this work, along with other work to be done on this sheet, to question #12 on this exam.Enter the word "Finished" into the text-box below when ready to move on.

QUESTION 4

Suppose the alternative, that the open market desk does nothing different, that is, they hold the amount of reserves constant. What happens in the reserve market? What is the market clearing fed funds rate now? Label this development, that is, the new equilibrium as point C. Be sure to show all work.

NOTE: This work is to be done using theExam Sheet 2 Part 2 B.You will upload this work, along with other work to be done on this sheet, to question #12 on this exam.Enter the word "Finished" into the text-box below when ready to move on.