Question

Multiple Choice

1. Assume that the money multiplier equals 2.5 and if the Fed purchases $10 million in bonds from a bank, the monetary supply will:

1. Increase by $10 million.
2. Increase by $25 million.
3. Decrease by $10 million.
4. Decrease by $25 million.

2. The monetary base is defined as:

1. all currency in circulation.
2. checkable deposits at depository institutions.
3. excess reserves in the banking system.
4. currency plus total banking reserves.

3. Which of the following means of financing federal government spending will increase the monetary base?

1. raising the corporate income tax.
2. raising the personal income tax.
3. selling bonds to the public.
4. selling bonds to the Fed.

Short Answer

1. Assume the Federal Reserve Board is undertaking an expansionarymonetary policy. Explain the details of how the expansionary Fed impacts each of the following:

1. Open market operations - how does the Fed use open market operations for an expansionary monetary policy?
2. The monetary base.
3. Money Supply.
4. Fed funds interest rate.
5. Long-term interest rates.
6. Business Investment.
7. Aggregate demand.
8. Economic growth.
9. Unemployment rate.

2. Under certain circumstances, expansionary Fed policy may not have much of an effect on the rate of economic growth. Give a reason why, and explain?

3. Regarding the Asian currency crisis, answer the following questions:

1. Describe the normal reasons why a currency undergoes a significant depreciation and what were the important characteristics of the Asian countries involved in the crisis?
2. What are some expected domestic economic consequences of the currency crisis for the countries involved? Focus on:
   • import prices of goods and services into the Asian country.
   • export prices of goods and services from the Asian country.
   • Domestic inflation rates.
3. Assume that the countries involved undertake a tight monetary policy and raise interest rates in response to the crisis. What are the two primary reasons for raising interest rates in their case?
4. Given high domestic interest rates, what is the economic outlook for these Asian countries in the next few years?