Foreign Exchange Market
Who are the groups of individuals that interact with the foreign exchange market?
Tourists, firms that sell across borders, and foreign financial investors.
What is the U.S.'s largest spending category?
Social security
What are the four functions of money?
Unit of account, store of value, medium of exchange, and standard of deferred payment
What is forward guidance? What must happen for it to be effective?
When the FOMC makes statements about how it will conduct monetary policy in the future to signal to consumers and firms about what to expect so they can adjust their spending habits. It is only effective if consumers and firms trust/believe the Fed.
List everything included in M1.
Physical currency, money in checking accounts, money in savings accounts.
Give three different scenarios that would cause the demand for the U.S. dollar to increase.
Higher relative interest rates in the U.S.
Increased tourism from foreigners
Expectations that the dollar will appreciate in the future
Give an example of something included in mandatory spending and discretionary spending.
Mandatory spending: Social Security and Medicare
Discretionary spending: Education, national defense, and healthcare.
Explain the difference between fiat currency and commodity currency.
Fiat money: A government issued currency not backed by a commodity.
Commodity money: A physical item that has value in itself and can be used to buy goods. It has value even if it's not used as money.
When would commerical banks be likely to use the discount rate for a discount loan from the Fed?
If many other commerical banks are unable to issue a loan, the Fed serves as the lender of last resort.
Explain why the supply curve for reserves is vertical.
Because it is not influenced by policy rates it is completely controlled by the Fed therefore changes to the supply of reserves can influence policy rates.
A surge in domestic consumers buying more foreign goods increases the demand for foreign currency and the supply of domestic currency, leading to this result in the domestic currency's value.
Depreciation
Give an example of a progressive tax and a proportional tax.
Progressive tax: Federal income tax
Proportional tax: Sales tax
What is included in M2?
What tool does the Federal Reserve use that is most effective in influencing the federal funds rate following the 2008 recession?
Interest on Reserve Balances
Consider the foreign exchange market between Brazil and the US. Assume that Brazil has higher interest rates relative to the US. How will these changes impact the foreign exchange market between these two countries, what will happen to the value of the US dollar. (Draw the graph)
US dollar will depreciate.
Consider the foreign exchange market between the U.S. and China. If the U.S. passes a travel policy that makes it harder for individuals from other countries to visit how would this impact the foreign exchange market between the two countries? (Assuming China has a lot of individuals interested in visiting the U.S.)
Dollar will depreciate, yuan will appreciate
What does the Federal Open Market Committee (FOMC) consist of?
12 voting members
7 members of the Federal Reserve's Board of Governors
Presidents of the Federal Reserve Banks
A bank receives a deposit of $90,000 and has $20,000 worth of government securities. They loan out $84,960 and now have zero excess reserves. What is the reserve requirement ratio for this bank?
List all of the tools we discussed under an ample reserve regime that the Federal Reserve can use to influence the federal funds rate (there's four).
Discount rate, OMO, ON RRP, IORB.
Inflation was previously 3% in equilibrium and it has increased to 5% what will happen to the Phillips curve as consumers adjust their expectations. Draw the graph.
N/A
How does the foreign exchange market work as an additional channel to influence the aggregate market after changes to monetary policy?
Changes to monetary policy are implemented to correct the market, and changes to interest rates will impact the foreign exchange market. Changing the value of a currency will impact net exports and therefore further influence the aggregate market. Explain the process.
If the government is trying to close a $100 million recessionary gap and MPC is 0.3, what changes should be made to tax policy to close this gap?
Cut taxes by $233.1 million.
Identify how expansionary monetary policy will impact:
interest rates, price level, real GDP, consumption, investment, aggregate demand, value of the dollar, exports, imports, and net exports.
interest rates: decrease
price level: increases
real GDP: increases
AD: shifts to the right
dollar: depreciates
exports: increase
imports: decrease
Explain how quantitative easing is different from open market operations.
Quantitative easing involves purchasing longer-term riskier assets and is only utilized when faced with the zero lower bound.
If traders expect a country's (Country A) economy to boom next year, they may buy its currency today—this speculative demand tends to push its currency in this direction. Draw the foreign exchange market graphs for two countries (Country A and Country B)
Country A's currency will appreciate.