The primary purpose of the Fed\'s so called QuantativeEasting as part of non con
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The primary purpose of the Fed's so called QuantativeEasting as part of non conventional monetary policy action conducted since 2010 was the purchase of mortgage Backed securities(MBS) and LT Treasury Bonds by the Fed(the central bank of the US) to recover the Housing Market and RealEstate Market that were hardest hit by the Great recession of 2008.In October 2014,the Fed suddenly stopped (as anticipated though) purchasing the MBS altogether.This was done in response to the storng and sustained economic recovery since the beginning of the Fallof 2013. From your knowledge about the exponsionary monetary policy and its potential effects on Macroeconomic veriables,theimmediate effect(s) of the ending of Fed's QE program would be,among others,Explanation / Answer
23.
In most country the job of manipulating the supply of money belongs to the “central bank”. In United States the central bank is 12 institutions closely tied together and collectively called the Federal Reserve System or the Fed. It is created in 1913. It is privately owned by the banks that belong to it.
The Federal Reserve Board of Governors and the FOMC are the prime decision maker for U.S. monetary policy. They decide whether to expand money supply to increase economic activity or to or to decrease money supply to decrease inflation. The Fed has three major methods by which to control the supply of money: it can engage in open market operation, change reserve requirement, or change its discount rate.
The open market operation is the most important method that the Fed uses to influence the supply of money. The Fed in order to increase the supply of money, the FOMC tells the trading desk at the Federal Reserve Bank in New York to buy U.S. government securities from the public in the nation’s bond market. The sellers of the bond will likely to deposit their fund in the bank. The bank only has to hold the fraction of the new deposit as required reserve and the excess is the excess reserve, this increases the excess reserve of the bank.
The bank loan out this excess reserve to a borrower and increase the borrower’s checking deposit at the Bank. The borrower then spends the new fund to purchase something and writes a check in the name of his seller. The seller deposits the new fund at his bank which increases the excess reserve of that bank and the whole process continues. This way the initial increase in money gets multiplied and increases the money supply by the multiplier times of initial increase in money supply.
Therefore, the halt in QE by the Fed decreases the amount in the buyer’s checkable account and decreases the bank’s excess reserve. The banks will lend less money and the money supply in the economy would fall.
Therefore, the correct option would be:
24.
Exchange rate is the price of one currency expressed in terms of another currency. The exchange rate is determined by the world demand and supply of any currency. The world demand and supply of any currency depends on the demand and supply of traded goods. Thus, the exchange rate is indirect function of traded goods.
The theory of purchasing power parity (PPP) states that the exchange rate will be in equilibrium if the same bundle of good will have same velue in both country. That is the same budle of good will cost same in both currency.
The cost of big MAc in China is 32 Yen and in US it is $4. The $4 is as good as 32 Yen and thus $1 is as good as 8 Yen. On the other hand, 1 Yen is as good as $0.125.
Therefore, the correct answer is
25.
The exchange rate however does not take into account the demand and supply of non-traded goods. Therefore, the exchange rate often overestimates the true cost of living in any country. The non-traded goods are those goods that cannot be traded across borders. This includes service, houses, and lands. The price of these goods includes wages that is paid in domestic currency. The factor prices are directly related to the productivity of the factors. Different countries have different types of labors and productivity.
Comparing between two countries, the correct answr is
26.
The correct option is:
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