Economics problems

1. Chapter 16, problems 16-8, 16-12, and 16-14
2. Chapter 15, problems 15-4, 15-14, and 15-16

16-8. Suppose that the quantity of money in circulation

is fixed but the income velocity of money doubles.

If real GDP remains at its long-run potential

level, what happens to the equilibrium price

level? (See page 354.)

16-12. Assuming that the Fed judges inflation to be the

most significant problem in the economy and that

it wishes to employ all of its policy instruments

except interest on reserves, what should the Fed

do with its three policy tools? (See page 357.)

16-14. Imagine working at the Trading Desk at the New

York Fed. Explain whether you would conduct

open market purchases or sales in response to

each of the following events. Justify your recommendation.

(See page 353.)

a. The latest FOMC Directive calls for an increase

in the target value of the federal funds rate.

b. For a reason unrelated to monetary policy, the

Fed’s Board of Governors has decided to raise

the differential between the discount rate and

the federal funds rate. Nevertheless, the FOMC

Directive calls for maintaining the present federal

funds rate target.

15-4. Considering the following data (expressed in

billions of U.S. dollars), calculate M1 and M2.

(See pages 323–324.)

Currency 1,050

Savings deposits 5,500

Small-denomination time deposits 1,000

Traveler’s checks outside banks and thrifts 10

Total money market mutual funds 800

Institution-only money market mutual funds 1,800

Transactions deposits 1,140

15-14. Draw an empty bank balance sheet, with the

heading “Assets” on the left and the heading

“Liabilities” on the right. Then place the following

items on the proper side of the balance sheet.

(see page 332.)

a. Borrowings from another bank in the interbank

loans market

b. Deposits this bank holds in an account with

another private bank

c. U.S. Treasury bonds

d. Small-denomination time deposits

e. Mortgage loans to household customers

f. Money market deposit accounts

15-16. The Federal Reserve purchases $1 million in U.S.

Treasury bonds from a bond dealer, and the

dealer’s bank credits the dealer’s account. The

reserve ratio is 15 percent. Assuming that no currency

leakage occurs, how much will the bank

lend to its customers following the Fed’s purchase?

(See pages 333–334.)