Potential output for a country is assessed to be $100 billion. Despite this, estimates indicate that...
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Potential output for a country is assessed to be $100 billion. Despite this, estimates indicate that the current actual output is $70 billion. a. Draw an AD-AS diagram depicting the current economic situation. Is this an inflationary gap or a recessionary gap? b. Suppose the Central Bank of the country has decided to intervene with monetary policy. It plans to use its main policy tool, open market operations (OMOs) to help close the output gap. How should the central bank adjust its target interest rate to accomplish this? Explain your reasoning in detail, noting how the change in the interest rate ends up affecting the output gap. c. To achieve the new target rate, the Central Bank has estimated that money supply needs to change by $340 billion. Will this change increase or decrease money supply? d. Suppose that the required reserve ratio for banks is 10%, however, all banks keep 20% of their deposits in reserve. Moreover, assume that every loan made by banks results in a new checkable deposit equal to the amount of the loan, in other words, none of the loans are held in cash by the borrower. By how much does the Central Bank need to change the monetary base if it wants to change the money supply by $340 billion? e. What is the relationship between the money multiplier and banks holding reserves in addition to the required amount? Based on this, in what way(s) do bank holdings of excess reserves affect the Central Bank's open market operations (OMOs)? f. Assume the Central Bank conducts all of its open market operations (OMOS) with First Street Bank shown below. Write the debits and credits that would result from the OMOS Specify each. First Street Bank's T-account Assets $X b Liabilities Assets Treasury bills Deposits Federal Reserve T-account Cop Liabilities $X b Monetary Base $800 b. cre $X b g. Suppose First Street Bank was maintaining its desired reserve ratio of 20% (see part d) before the OMOS in part (f). How much did the bank have in reserve before the OMOS? How much does it have in reserve after the OMOS? Potential output for a country is assessed to be $100 billion. Despite this, estimates indicate that the current actual output is $70 billion. a. Draw an AD-AS diagram depicting the current economic situation. Is this an inflationary gap or a recessionary gap? b. Suppose the Central Bank of the country has decided to intervene with monetary policy. It plans to use its main policy tool, open market operations (OMOs) to help close the output gap. How should the central bank adjust its target interest rate to accomplish this? Explain your reasoning in detail, noting how the change in the interest rate ends up affecting the output gap. c. To achieve the new target rate, the Central Bank has estimated that money supply needs to change by $340 billion. Will this change increase or decrease money supply? d. Suppose that the required reserve ratio for banks is 10%, however, all banks keep 20% of their deposits in reserve. Moreover, assume that every loan made by banks results in a new checkable deposit equal to the amount of the loan, in other words, none of the loans are held in cash by the borrower. By how much does the Central Bank need to change the monetary base if it wants to change the money supply by $340 billion? e. What is the relationship between the money multiplier and banks holding reserves in addition to the required amount? Based on this, in what way(s) do bank holdings of excess reserves affect the Central Bank's open market operations (OMOs)? f. Assume the Central Bank conducts all of its open market operations (OMOS) with First Street Bank shown below. Write the debits and credits that would result from the OMOS Specify each. First Street Bank's T-account Assets $X b Liabilities Assets Treasury bills Deposits Federal Reserve T-account Cop Liabilities $X b Monetary Base $800 b. cre $X b g. Suppose First Street Bank was maintaining its desired reserve ratio of 20% (see part d) before the OMOS in part (f). How much did the bank have in reserve before the OMOS? How much does it have in reserve after the OMOS?
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Sure lets break down each question step by step a To draw an ADAS diagram depicting the current economic situation where the potential output is 100 billion and actual output is 70 billion you would d... View the full answer
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Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
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