Financial Markets and Institutions (2-downloads)

17. Why might inflation targeting increase support for the

independence of the central bank to conduct mone-

tary policy?

18. “Because the public can see whether a central bank

hits its monetary targets almost immediately, whereas

it takes time before the public can see whether an

inflation target is achieved, monetary targeting makes

central banks more accountable than inflation tar-

geting does.” Is this statement true, false, or uncer-

tain? Explain your answer.

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Part 4 Central Banking and the Conduct of Monetary Policy

19. “Because inflation targeting focuses on achieving the

inflation target, it will lead to excessive output fluc-

tuations.” Is this statement true, false, or uncertain?

Explain your answer.

20. “A central bank with a dual mandate will achieve

lower unemployment in the long run than a central

bank with a hierarchical mandate in which price sta-

bility takes precedence.” Is this statement true, false,

or uncertain?

Q U A N T I TAT I V E   P R O B L E M S

1. Consider a bank policy to maintain 12% of deposits as

reserves. The bank currently has $10 million in

deposits and holds $400,000 in excess reserves. What

is the required reserve on a new deposit of $50,000?

2. Estimates of unemployment for the upcoming year

have been developed as follows:

4. Use T-accounts to show the effect of the Federal

Reserve being paid back a $500,000 discount loan

from a bank.

5. The short-term nominal interest rate is 5%, with an

expected inflation of 2%. Economists forecast that

next year’s nominal rate will increase by 100 basis

points, but inflation will fall to 1.5%. What is the

expected change in real interest rates?

For Problems 6–8, recall from introductory macroeconom-

ics that the money multiplier = 1/(required reserve ratio).

6. If the required reserve ratio is 10%, how much of a

new $10,000 deposit can a bank lend? What is the

potential impact on the money supply?

7. A bank currently holds $150,000 in excess reserves.

If the current reserve requirement is 12.5%, how

much could the money supply change? How could

this happen?

8. The trading desk at the Federal Reserve sold

$100,000,000 in T-bills to the public. If the current

reserve requirement is 8.0%, how much could the

money supply change?

What is the expected unemployment rate? The stan-

dard deviation?

3. The Federal Reserve wants to increase the supply of

reserves, so it purchases 1 million dollars worth of

bonds from the public. Show the effect of this open

market operation using T-accounts.

W E B   E X E R C I S E S

Conduct of Monetary Policy: Tools, Goals,

Strategy, and Tactics