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Solutions to the End-of-Chapter Questions and Problems
15.1 The Goals of Monetary Policy
Learning objective: Describe the goals of monetary policy.
Review Questions
1.1 Monetary policy aims to advance the economic well-being of the country’s citizens. Economic
well-being is typically determined by the quantity and quality of goods and services that
1.2 The Fed seeks to reduce cyclical unemployment. The Fed does not seek to reduce the
1.3 Interest rates represent the cost of borrowing by firms and households. Fluctuating interest rates
1.4 Excess fluctuations in the foreign exchange value of the dollar would make it difficult to know
Problems and Applications
1.5 Deflation, just like inflation, complicates the ability to distinguish overall price changes from
1.6 a. Extraordinary easing measures mean expansionary monetary policy of low interest rates and
b. The expansionary policy of low interest rates would stimulate spending, putting upward
c. Answers will vary. When deflation or high inflation is caused by a demand shock (too
little or too much aggregate spending), then the columnist is correct that the single mandate of
However, when the deflation or inflation is caused by a negative supply shock, such as an
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1.7 For its goal of high employment, the Fed seeks an unemployment rate equal to the natural rate of
1.8 The Fisher effect, which was discussed in Chapter 4, indicates that nominal interest rates
1.9 If the exchange rate between the Japanese yen and the U.S. dollar changes from ¥85 $1 to ¥95 $1,
15.2 Monetary Policy Tools and the Federal Funds Rate
Learning objective: Understand how the Fed uses monetary policy tools to influence the federal
funds rate.
Review Questions
2.2 The federal funds rate is the interest rate that banks charge each other on very short-term loans,
2.3 As the federal funds rate increases, the opportunity cost to banks of holding excess reserves
increases because the return they could earn from lending out those reserves goes up. The
2.4 The supply of reserves is determined by the Fed supplying nonborrowed reserves through open
Problems and Applications
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2.6 The graph on the left below shows that to lower its target for the federal funds rate from
iff 1
¿
to
iff 2
¿
, the Fed can conduct an open market purchase of securities. In the graph, the open
purchase shifts the supply curve for reserves to the left from S1 to S2. In the graph, we assume
that in addition to increasing its target for the federal funds rate, the Fed increases the discount
rate from id1 to id2. As a result, the horizontal section of the supply curve for reserves shifts up.
2.7 a. To raise the federal funds rate, the Fed would sell securities, which shifts the supply curve for
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b. Banks’ increased demand for reserves shifts the demand curve to the right from D1 to D2. To offset the effect
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c. An increase in the required reserve ratio would increase the demand for reserves. To
2.8 An open market sale of Treasury securities by the Fed decreases the supply of reserves, causing
the supply curve for reserves to shift to the left from S1 to S2. As shown, the shift in the supply
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2.9 a. To raise the target for the federal funds rate, the Fed conducted an open market sale of securities.
As shown on the graph below, the sale shifted the supply curve for reserves to the left from S1 to
2.10 a. To lower the target for the federal funds rate, the Fed conducted an open market purchase of
Treasury securities. As shown on the graph below, the purchase shifted the supply curve for
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Chapter 15 Monetary Policy 192
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