Economics and Statistics

  Assume that you have the following information about the federal funds market: Note that the discount rate must be above the federal funds rate in order for the latter to be effective. In other words, the supply curve becomes perfectly elastic at the DR.  Another important point is that the demand for federal funds also becomes perfectly elastic when the interest rate is at or below zero percent. At this rate, commercial banks demand federal funds as much as they can. You are tasked with conducting the optimal open market operation given that the economy just started to experience a downturn. Given available data you conclude that the optimal rate must be at 0.5%.  Solve for the new supply curve, find how many government bonds (in terms of dollars) should the Fed buy or sell. Then, explain what will happen to the aggregate demand on the AD/AS model. solve for the original rho (FFR): Set the FFR equal to 0.5%, and solve for the dollar amount: Assuming that in o...

  Tools of central bank policy: The RRR: it changes the amount of excess reserves in commercial banks, and changes the size of the money multiplier and thus impact how much money the banking system can create. In an expansionary policy, the Fed wants to lower the RRR in order to increase the amount of excess reserves. Commercial banks are then incentivized to loan it out. This will increase the supply of money in the economy which will then lower the nominal interest rate (i.e banks agree to loan out more at lower rates than before). In a contractionary policy, the Fed wants to increase the RRR, which will reduce the supply of money in the economy. The number of loans diminishes and the nominal interest rate goes up. Assume the RRR goes from 20% to 25%: we see that the money multiplier (m) goes from 5 to 4. Commercial banks create less money than before and make less loans. In the money market, the money supply curve shifts to the left, which causes the real interest rate to i...