Money and Banking Chapter 15

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Money and Banking
Practice Questions
Chapter 15

Question#7:Using the supply and demand analysis of the market for reserves, show what happens to the federal funds rate, holding everything else constant, if the economy is surprisingly strong, leading to an increase in the amount of checkable deposits.

A rise in checkable deposits will leads to a rise in the required reserves at any given interest rate, and this will therefore shift the demand curve to the right. However if the federal funds rate is below the discount rate, this will then leads to a rise in the federal funds rate. Also If the federal funds rate is at the discount rate, then the federal funds rate will just remain at the discount rate.

Question#12:How can the procyclical movement of interest rate…………………. Lead to a procyclical movement in the money supply as a result of Fed discounting? Why might this movement of the money supply be undesirable?

during a boom when the interest rate rise above the discount rate then there will be borrowing from the discount window making the level of borrowed reserves increase. This result will be a rise in the monetary base and also the money supply during a boom. Also during a recession if the market interest rate was above the discount rate then if they fall there will be less borrowing from the discount window and the monetary base will fall, this will then lead to a decline in the money supply. However the procyclical movement of the money supply will be undesirable because it would be expansionary when the economy is booming and contrationary when the economy is going into a recession.

Question#15:compare the use of open market operations, discounting and changes in reserve requirements to control the money supply on the following criteria: flexibility, reversibility, effectiveness, and speed of implementation.

Open market operations are more flexible, reversible, and faster to implement than the other discounting and changes in...
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