Questions Homework Chapter 10

1. Which goals of the US Central bank or Federal Reserve frequently conflict? Please
describe?
The goal of price stability often conflicts with the goal of high economic growth and
employment and interest-rate stability. When the economy is expanding along with
employment, inflation may rise. In order to pursue the goal of price stability, the Fed may
have to pursue a contractionary and anti-inflationary policy that conflicts with the goal of
high employment and economic growth. Similarly, when the central bank wants to pursue
tight monetary policy and raise interest rates in order to contain inflation, this pursuit of the
goal of price stability may conflict with the goal of interest-rate stability.

2. Describe the effect of the global financial crisis on the three-month Treasury Bill?
The effects of the global financial crisis lead to significantly lower wealth and income,
which depressed three-month Treasury Bill demand.

3. Why is the demand curve for Reserve becomes flat at the bottom rather than continually
slopping downward?
Demand curve for Reserve becomes flat at the bottom because the opportunity cost of
holding reserves is zero.

4. What is a non-borrowed reserved and why the supply curve for non-borrowed reserve
becomes flatten at the top? Also why it is upright shape?
Non-borrowed reserves are bank reserves that are not borrowed from Central Bank. Cost
of borrowing from the Fed is the discount rate. Borrowing from the Fed is a substitute for
borrowing from other banks. If iff < id, then banks will not borrow from the Fed and
borrowed reserves are zero. The supply curve will be vertical (upright shape). As iff rises
above id, banks will borrow more and more at id, and re-lend at iff . The supply curve is
horizontal (perfectly elastic) at id. (Flat at the top)
5. Why would happen to the Federal Fund rate if the Fed decide to conduct Open Market
Selling? Discuss by showing graphs of the possibilities?

6. Why would happen to the Federal Fund rate if the Fed decide to increase the discount rate
level? Discuss by showing graphs and the possibilities?