Tute Week 5

Topics: Monetary policy, Inflation, Central bank Pages: 2 (354 words) Published: May 24, 2015
5.Which goals of the Fed frequently conflict? Ch.10 10 marks Ans: One of the goals that fed frequently conflict

The Central bank’s main goal is to maintain the price stability in the market, meaning to keep inflation low and stable. The fed might have conflict while they are working to maintain the low inflation. This can be explained by time-inconsistency problem where fed abides to follow the set out plan in long run but instead choose to follow expansionary policy to promote short-run economic growth. Expansionary policy is the policy where the fed focuses on increasing the money supply. For example lowering the discount rate, which will result in lowering the cost of money, ensuing lower unemployment rate but in short run. In the long run inflation rate goes up because there will be easy money with low interest rate in the market.

6.Consider a bank policy to maintain 12% of deposits as reserves. The bank currently has $10 million in deposits and holds $400,000 excess reserves. What is the required reserve on a new deposit of $50,000? Ch.10 15 marks

Total Reserve(12%) = Required Reserve 8% (Bank vault) + Excess Reserve 4% (Deposit at the fed) The excess reserve = $4% of 10,000,000
= $400,000
Required Reserve = 8% of $50,000
= $4,000

7.Estimates of unemployment for the upcoming year have been developed as follows: Economy Probability Unemployment Rate
Bust 0.15 20%
Average 0.5 10%
Good 0.2 5%
Boom 0.15 1%
What is the expected unemployment rate? The standard deviation? Ch.10 15 marks

Economy
Prob
Unemployment Rate
Expectations
Bust
0.15
20%
0.03
Average
0.5
10%
0.05
Good
0.2
5%
0.01
Boom
0.15
1%
0.0015

Total = 0.0915

Expected Unemployment Rate would be 9.15%

S.D =
=
=0.05605978
=5.6059%

8. The short-term nominal interest rate is 5% with an expected inflation of 2%. Economists forecast...
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