Briefly explain the following:

a. Why does the Fed use monetary policy targets to conduct monetary policy?

b. What is the difference between the Fed's monetary policy goals and monetary targets?

c.Where and how are the short-term interest rates determined?

2. Assume that banks have limited reserves (operate under limited reserves regime) and explain the following:

a) What monetary policy tools the Fed uses to change the money supply and the short-term interest rates?

b) Which of the monetary tools from the above is the primary monetary tool when banks have limited reserves?

3. Assume that banks have large amount of reserves (operate under ample reserves regime) and explain the following:

a) What monetary policy tools the Fed uses to change interest rates in the economy?

b) Which specific interest rate the Fed changes to change other interest rates in the economy? What does the interest stay for?

c) Which of the monetary tools from the above is the primary monetary tool the Fed uses, and what does it stay for?

d) What monetary policy tool the Fed uses to ensure banks have large amount of reserves? Why the Fed uses currently different monetary policy tools to change interest rates in the economy?

4. Assume that output (Y) declines, there are shortfalls in employment, inflation falls below the target inflation rate. Explain the following Fed's action in the time of banks large reserves (ample reserves).

a) Would the Fed undertake expansionary or contractionary monetary policy? Why?

b) How would the Fed change the FFR (increase or decrease) to address the shortfalls in employment?

c) Describe the process by which would the Fed change the FFR to address the shortfalls in employment (how would the Fed set the target for the FFR, how would the Fed move the FFFR to the new target).

d) Why would the change in the FFR form the above address the problem of shortfalls in employment? Briefly explain the link between the FFR, other interest rates in the economy (nominal and real interest rates), consumers and businesses spending, AD, real GDP and unemployment.