Financial Markets and Institutions (2-downloads)

a. The three-month Treasury bill rate

b. The monetary base

c. M2

5. What procedures can the Fed use to control the

three-month Treasury bill rate? Why does control of

this interest rate imply that the Fed will lose control

of the money supply?

6. If the Fed has an interest-rate target, why will an

increase in the demand for reserves lead to a rise in

the money supply?

7. “Interest rates can be measured more accurately and

more quickly than the money supply. Hence an inter-

est rate is preferred over the money supply as an

intermediate target.” Do you agree or disagree?

Explain your answer.

8. Compare the monetary base to M2 on the grounds of

controllability and measurability. Which do you pre-

fer as an intermediate target? Why?

9. “Discounting is no longer needed because the pres-

ence of the FDIC eliminates the possibility of bank

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

Explain your answer.