(o cas points) On June 13 The Federal Open Market Commite decided to raise the f
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(o cas points) On June 13 The Federal Open Market Commite decided to raise the federal funds rate. Discuss the following points Part 2: Discuss (35 points) monetary policy? 2) What is the impact of this policy on credit markets and labor markets. 3) What is the impact of this policy on inflation and output (15 points) Imagine you are in charge of the monetary policy of a Central Bank. Because a recent severe economic crisis, you have to implement an expansionary policy Discuss 1) What is the main tool of monetary policy? 2) Explain how open market operations work in this case? Do you buy or sell bonds? What happens with interest rates? What happens with reserves at banks 3) What other tools does the Central Bank have to manage monetary policy? 4) What is the zero lower bound? Why is this a problem? What other tools does the Central Bank have to face this situation? (c) 5 points) Discuss the three theories of the origins of economic fluctuations Part 3: Multiple Choice (30 points, 2 points each 1) If the quantity theory of money holds, then in an economy, then A) Inflation- Growth rate of money supply Growth rate of real GDP B) Inflation-Growth rate of money supply Growth rate of nominal GDP C) Inflation-Growth rate of money supply-Growth rate of real GDP D) Inflation- Growth rate of money supply -Growth rate of nominal GDP am A th ques 2) Consider two countries: Country A and Country B. If the gap between the growth rate of money supply and growth rate of real GDP is larger in Country A than in Country B, then, according to the quantity theory of money, A) the inflation rate will be lower in Country A B) real interest rates will be higher in Country A C) nominal interest rates will be lower in Country A D) the inflation rate will be higher in Country AExplanation / Answer
Part 2:
A.
1.
Raising the federal fund rate, is the part of contractionary monetary policy, because it discourages the consumption and investment spending. It is used to control the inflation and bring price stability in the economy.
2.
A rise in the federal fund rate, will increase the interest rate in the credit market and it will lead to the decrease in demand of money in the credit market. Here, the movement will be along the demand curve in credit market. With squeezing of the credit in the market, firms will not be able to make investments and less number of jobs will be created. So, there will be a tight job market. At present, the unemployment level is 3.6% and it made the Fed to raise the FFR and let the job market situation to suffer a bit as employment scenario is very good in the US economy.
3.
It will control the price and inflation will be curbed. The aggregate demand will decrease and it will put downward pressure upon the output level. Here, the output level will be regulated in the short run. Though, in the long run, it real output level will not be affected.
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