1. List and briefly explain the 4 monetary controls used by all central banks.
2. In response to the Great Recession of 2008, the US Federal Reserve System (Fed) conducted extensive Open Market Operations purchasing US government and private financial securities. For several months in 2013, the Fed was purchasing these securities at the rate of $85 billion per month under a policy known as Quantitative Easing.
a. Go to the Federal Reserve Bank of New York, System Open Market Account Holdings. What Security Types are listed and what is the current total value?
b. Where did the Fed obtain the money to purchase these securities?
c. How do Open Market purchases affect the monetary base (money supply)?
d. If the Fed purchases a financial 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 reserves are increased. What affect does this have on the commercial bank's ability to lend money?
3. What are the factors determining the nominal interest rates?
4. The real risk-free interest rate is determined in the loanable funds market by supply and demand for real loanable funds. What 4 changes (?) would shift the supply of real loanable funds curve.
5. What 4 changes would shift the demand curve for real loanable funds?
6. 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 loanable funds market will play an important role. In the graphs below, show the shift in either demand or supply for real loanable funds by drawing in a new curve. (In MS Word, use Insert/Shape, then select and draw a line.) Write short explanation of the change in the real risk free interest rate (Y-axis) and the real loanable funds per time period (X-axis). Here an example of a graph as given in a typical problem and with the completed graph on the right.
a. The central bank engages in Open Market purchases of government securities.
b. The US Treasury Department borrows money to finance infrastructure building.
c. The US Federal Reserve Bank increases the monetary base and the Treasury Department simultaneously borrows to finance an increasing government deficit.
