Please answer in 1-3 paragraphs. Thank you Since October 2008, the Fed has paid
ID: 1124893 • Letter: P
Question
Please answer in 1-3 paragraphs. Thank you Since October 2008, the Fed has paid interest on reserves. Why? What is has been the effect on the monetary base? Money multiplier? Money supply? How long should the Fed continue to pay interest on reserves? Explain. (20 points) 1. 2.Explain the three conventional monetary policy tools and account for their advantages and disadvantages. (20 points Does the Fed need to normalize the Fed Funds Rate and its balance sheet? If so, how should it do it? What are the implications both positive and negative for your choice of whether or not to 3. normalize. (20 points) 4. The Fed has a dual mandate of price and output stability. The ECB has a single mandate of price 5. "Should central banks try to stop asset-price bubbles?" Weigh three pros with three cons. (20 6. Graphically illustrate and carefully analyze the U.S. economy currently and prospectively using stability. Who is right? Should financial stability be an additional mandate as Martin Feldstein argued recently in The Wall Street Journal. (20 points) points) AS/AD analysis. (20 points)Explanation / Answer
a.) Until Oct 2008 FED has not paid any interest on reserves (reserves: obligatory + excess parts). Therefore, the banks has minimised the (excess-)reserve with the FED. Now, by setting the interest rate paid on reserves the FED - acc. to its actual monetary strategy - is able to influence the banks' intention to increase/decrease their excess-reserves with the FED (when the rate higher than what they can earn on the market, they increase their reserve, when lower, they decrease it). (Partially) by this the money supply is controlled. Setting this rate, it's one of the tools of FED's monetary policy.
In October 2008 Congress gave the Fed a new tool for monetary policy, the power to pay interest on bank reserves. The amount of excess reserves that a bank wants to hold depends on the difference between the return on reserves and the return that it can earn on alternative assets. Prior to October 2008 the Fed could do little to affect this amount, but after October 2008 it could manipulate this amount with the interest rate on reserves. Now if it wants banks to hold more excess reserves, it will raise the interest rate it pays on excess reserves. If it wants banks to hold fewer excess reserves, it will lower the interest rate it pays on these reserves.
From the Fed's point of view, this new policy tool seems similar to how it does open-market operations. For more than two decades it has been setting an interest rate, the Federal-funds rate, to control the amount of bank reserves in the system. The Federal-funds rate is the interest rate at which banks lend or borrow deposits at the Fed--bank reserves--among themselves. Banks do not need excess reserves to make new loans. When they find opportunities to make profitable loans, they make those loans and then find the needed reserves, often using the Federal-funds market. If many banks make loans at the same time, the Federal-funds rate will tend to rise, but the Fed will limit the rise by increasing the supply of bank reserves.Once the Fed set a target Federal-funds rate, it passively supplied or withdrew reserves from the banking system. However, if the FOMC thought bank lending and total bank reserves were growing too rapidly, it could slow them by raising the target Federal-funds rate. If it thought bank lending and growth of bank reserves were too low, it could stimulate them by lowering the Fed-funds rate.
b.) The three main tools are the discount rate (called repo rate in India), reserve requirements, and open market operations.
c.)