Money and Banking

Answer each of the following four questions in detail. Your response to each is worth up to 25 points. Your responses are due to me by midnight on Thursday, April 14. No exceptions will be made for late arriving work.

(1) As fluctuations in the economy arise with movements in the business cycle, stabilization is often a monetary policy goal. Discuss in detail how price stabilization and interest rate stabilization are in conflict. That is, explain why stabilizing prices comes at the expense of interest rate stability, and vice versa.

(2) Describe in detail how the FOMC conducts open market operations.

(3) Suppose you are an economic analyst at the International Monetary Fund (IMF). The IMF is considering making a large loan to rescue a small country's government (say, Jamaica). The Jamaican economy is in a long, deep recession, which has hurt its government's ability to collect taxes and, consequently, its ability to pay its debt obligations. You are asked for a policy recommendation as to whether the IMF should mandate Jamaica adopt a fixed exchange rate (to, presumably, the U.S. Dollar) as a requirement for receiving the bailout loan. What are the pros and cons to this policy that you would outline in your report?

(4) Describe in detail the "lender of last resort" function of the Federal Reserve. Also, connect this function to the concept of risk preferences to justify its value.