1. Define inflation. Within the context of our AD-AS model and assuming long-run AS is constant, what must be true about AD for there to be inflation…

1. Define inflation. Within the context of our AD-AS model and assuming long-run AS is constant, what must be true about AD for there to be inflation in the long-run? What do 2. Indicate whether the following statement is true, false, or uncertain and explain your answer. “Since increases in government spending raise aggregate demand, fiscal policy by itself can be the source of inflation.”3. Indicate whether the following statement is true, false, or uncertain and explain your answer. “A cost-push inflation occurs as a result of workers’ attempts to push up their wages. Therefore, inflation does not have to be a monetary phenomenon.”4. (a) Indicate whether the following statement is true, false, or uncertain and explain your answer. “A budget deficit that is only temporary cannot be the source of inflation.” (b) Under what conditions can a budget deficit be the source of inflation?5. Since price stability is a goal of central banks, why might a central bank engage in inflationary monetary policy? Explain the alternative reasons this might happen. 6. Suppose that long-run AS is constant and that there are no changes in fiscal policy. Suppose that the central bank has been expanding the money supply at a 6% annual rate for a long time. Suppose that the real interest rate is 3%. What is the b. Illustrate what is happening to AD and short-run AS in this case Hint: if the central bank has been expanding the money supply at a 6% rate for a long time, workers will expect this and will form their expectations of the price level accordingly.c. Suppose now that the central bank thinks the inflation rate is too high and unexpectedly reduces the growth rate of the money supply to 3%. 1. What would happen to output in the short-run? 2. What would happen to the inflation rate in the long-run?9. What are the primary functions of a central bank? 10. The trend in the world is to more independence for central banks.a. Are central banks typically free to choose their own goals? Explain briefly.b. What is meant by instrument independence? c. What are arguments for more independence for central banks? What are the arguments against? d. Is the inflation rate higher or lower for more independent central banks than less independent central banks? Are output fluctuations higher for more independent central banks than less Do your answers support or oppose the movement to more independence for central banks?211. What event lead to the establishment of a true central bank in the U.S.? When was the Federal Reserve created? When did operations begin?12. Why was the Federal Reserve set up with 12 regional Federal Reserve banks rather than just one centralized bank as was typically the case for many European countries? 13. What are the goals of the Federal Reserve today? Are all the goals independent of one another? Explain briefly.14. What are the main elements of the structure of the Federal Reserve?15. How many members are there on the Board of Governors? How long are their terms? Are the terms renewable? Who appoints them? Who appoints the chairman of the BoG and what is the term of the chairman? Is this term renewable? 16. What are the monetary policy functions of the Governors of the Federal Reserve?17. How many district banks are there in the Federal Reserve system? Who owns these banks? Does ownership imply control?18. What are the monetary policy functions of the District Fed banks? Which District Bank President is always on the FOMC?19. What is the function of the Federal Open Market Committee? Who are the members of this committee? Who is the Chairman of the FOMC?20. Are all commercial banks members of the Federal Reserve system? If not, which banks must join? Approximately what proportion of banks are members of the Federal Reserve? 21. What characteristics give the Federal Reserve substantial independence? How do long and nonrenewable terms for the members of the Board of Governors contribute to independence?22. What is primary way Congress can exert political influence on the Federal Reserve? What influence does the President have on the Federal Reserve?23. In democracies, elected officials and decision-makers in government are typically held Does the independence of the Federal Reserve mean that it is not accountable for its actions? Explain.24. Today it is thought that central banks should be transparent about their actions. What does the Federal Reserve do that contributes to public understanding about their decisions?25. Who are the players in the money supply process?26. What are the main items on a central bank’s balance sheet? What is the monetary base? Define it in terms of uses of the monetary base and sources of the monetary base.27. What are open market operations?328. Indicate what happens to banking system reserves and the monetary base in each case. Treat each case as separate.a. the Fed buys $1m in government securities from a government security dealer who holds deposits in the Bank of Lilliput and the dealer deposits the Fed’s check in the bankb. the Fed buys $1m in government securities from a government security dealer who holds deposits in the Bank of Lilliput and the dealer deposits the Fed’s check in the bank but immediately withdraws $500,000 in cash from her accountc. the Fed sells $2m in government securities to a government security dealer who pays by writing a check on his account in the Bank of Brobdingnagd. the First Bank of Penury borrows $5m from the Federal Reservee. the First Bank of Penury repays the discount loan of $5m to the Federal Reservef. While on the run from President Logan’s thugs, Jack Bauer uses his bank’s ATM to withdraw $1000 from his checking account29. When the Federal Reserve increases the monetary base through open market purchases, the money supply rises by a multiple of the change in the monetary base. What fundamental characteristic of the banking system allows this to happen?30. What is the simple deposit multiplier? Write it down and explain each element.31. For parts a – d, assume (1) a required reserve ratio of 10% (.10), (2) banks don’t hold excess reserves, and (3) the public doesn’t change its holdings of currency, answer the following. For part e, assume only 1 and 2. For part f, assume only 1 and 3.a. Suppose the Fed makes a $1m open market purchase. What happens to total deposits and the money supply? What happens to total loans + security holdings of banks?b. Suppose the Fed makes a $2m open market sale. What happens to total deposits and the money supply? What happens to total loans + security holdings of banks?c. If banks collectively borrow $3m from the Federal Reserve, what happens to total deposits and the money supply? d. If the Federal Reserve increases the reserve requirement ratio to 20%, what happens to the change in total deposits and the money supply in part 1 of this question? e. While on the run from President Logan’s thugs, Jack Bauer uses his bank’s ATM to withdraw $1000 from his checking account. What happens to total deposits and the money supply?f. Suppose that banks become concerned that borrowers won’t repay loans and that issuers of securities may default on bonds they’ve issued. What will happen to total deposit and the money supply?32. Since banks earn no interest income on excess reserves, why do they hold excess reserves? Hint: if a bank is holding no excess reserves and it suffers a reserve deficiency because of a deposit outflow from the bank, what are the bank’s options in dealing with the reserve deficiency? 33. What are the main determinants of the amount of excess reserves held by banks?34. What is the primary determinant of deposits and the money supply in the long-run? 35. Banks issue both transactions deposits (D) and time and savings deposits. Currently there are no reserve requirements on either time or saving deposits. Suppose the Fed 4decided to impose reserve requirements on both time and savings deposits, other things equal. What would happen to the volume of D and M1? Why?36. During the Great Depression years, the money supply declined by about 25%. Using our money supply model, explain this decline in the quantity of money?The following questions relate to material that may be on the 3rdexam. We’ll see next week how much we cover.37. What are the policy tools of the Fed? Which is most important? Why? (compare this tool with the others)38. Distinguish between dynamic and defensive open market operations. Define repurchase agreements, matched sale/purchase agreements, and outright purchases. When does the Fed use each type?39. What is the primary rationale for reserve requirements today? Would the Fed lose control over the money supply if reserve requirements were abolished? Explain.40. What types of discount loans does the Fed make? Which is the most common?41. What is the relationship between the discount rate and the federal funds rate since Jan. 2003

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