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Conditions for Federal bank's money supply level with the given reserve requirement.

The current money supply is $8,000. For each of the following, state the money multiplier, the monetary base, and describe how the Fed would have to change the discount rate to achieve the desired change in the money supply. Suppose for every percentage-point decline in the discount rate, banks borrow an additional $50. Assume banks hold no excess reserves and individuals hold no money.

a.Reserve requirement is currently 0.1. The Fed wants to increase the money supply by $600.

b.Reserve requirement is currently 0.5. The Fed wants to increase the money supply by $400.

c. Reserve requirement is currently 0.4. The Fed wants to decrease the money supply by $250.

2. State the Taylor Rule and use it to predict the Fed\'s target for the Fed funds rate in the following situations:

a. Inflation is 3%, which is 1% above the desired rate while output growth is 4%, which is 1% above potential.

b. Inflation is 2%, which is the target rate. Output growth is 4%, which is 1% above potential.

c. Inflation is 1%, which is 1% below the desired rate while output growth is 2%, which is 1% below potential.

 

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M922672

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