Assignment Paper

Part 1
TRUE, FALSE, UNCERTAIN – and WHY?

Your answers need not be more than two or three sentences, but you should write them very carefully. Study the statements closely, and search for the best and most complete (and concise) way to answer them.

1. If the demand for Eurodollars weakens, the resulting flood of dollars will depress the U.S. dollar in international markets.
2. The discount rate is always lower than the Fed funds target rate.

3. The Glass Steagall Act prevented interstate banking.

4. (Regarding the NY Post article I posted) Quantitative Easing II, in which $600b of Treasury bonds are to be purchased by the Fed, will substantially increase the money supply and therefore inflation.

5. The main instrument of monetary policy is reserve requirements.

6. U.S. banks are top in the world in terms of their asset size.

7. Around the world, legislatures are getting more control over central banks. This is part of a general movement toward greater democracy.

8. When the Fed buys long-term Treasury securities (as in Quantitative Easing II), this will drive down long-term interest rates much more than a purchase of short-term U.S. Treasury securities would.

9. In March of 1951, the Federal Reserve became part of the U.S. Treasury Department.

10. All Fed Governors are appointed for 14 year terms, except the Chair. The Chair is only appointed for 4 years at a time.
Part 2
Bummerland finds itself in a major depression. Wages are rigid-downward in Bummerland, so there is no automatic process by which recovery can take place.

Here are some important facts about Bummerland you’ll need:
(1) the marginal propensity to consume is .75 and the “marginal propen¬sity to hold money” (k) is .2; (2) the required reserve ratio against demand deposits is .11; (3) the ratios of currency to demand deposits and of time deposits to demand deposits are .4 and 5.2, respectively; (4) the required reserve ratio for time deposits is .01; (5) the excess reserves to demand deposits ratio is .007; and (6) there is no discount window in Bummerland. The appropriate definition of money in Bummerland is M1.

The expectations theory of interest rate term structure holds.

The Bummerbank and the Treasury have agreed to coordinated policy and have narrowed the choices down to four:

(1) a $100 billion increase in government expenditure, financed by increasing sales of bonds to the public; (2) a $100 billion increase in government expenditure, half of the funds raised from taxing the public and the other half from bond sales to the public; (3) a $100 billion increase in government expenditure, half financed from raising taxes paid by the public, the other half by issuing monetary base; (4) a $100 billion open market operations purchase of government securities.
QUESTIONS:
1. Describe in general terms (with IS,LM diagrams) the effects that each of these policies would have on Bummerland.
2. What is the change in M1 in each of these four cases?
3. Compare (i.e., rank) the effects that each of these policies will have on the level of long term and short term (separately) interest rates, and Y*.
If there is not enough information to make the comparison, state what additional information would be necessary to make a complete ranking.]