Home » (11 pts) Since August 2008 there have large injections of reserves and currency in circulation, yet there has been a small increase in the money…

(11 pts) Since August 2008 there have large injections of reserves and currency in circulation, yet there has been a small increase in the money…

(b)   (7 pts) Before the channel-corridor model was used, explain why the deviation of the equilibrium federal funds rate from the target was potentially very large and quite volatile.

(c)  (6 pts) Assume the Federal Reserve is using the channel/corridor approach. Suppose the equilib-rium Federal Funds rate is equal to the discount rate, which is above the targeted Federal Funds rate and borrowed reserves are always positive. Illustrate how this can occur using a graph of the Federal Funds market.

(d)   (6 pts) In response to an equilibrium Federal Funds rate consistently above the target (so the situation described in part (c)), the Federal Reserve increases nonborrowed reserves. Under what circumstances is this monetary policy procyclical? Under what circumstances is it countercyclical? Discuss.

7.  (25 pts) A foreign country (say Japan) is concerned its in ation rate is too high and decides to use monetary policy to lower in ation. Assume there is a liquidity e ect. In your answers below, you must draw a graphs to receive full credit.

(a)  (5 pts) Provide a de nition of the liquidity e ect.

(b)   (5 pts) What type of monetary policy will Japan use to lower in ation, assuming there is a liquidity e ect?

(c)  (5 pts) Describe the impact of Japan’s monetary policy on the equilibrium nominal exchange rate between the US and Japan.

(d)   (5 pts) The policy is successful and the Japanese in ation rate is lowered. Describe the long-run implications for the nominal exchange rate of the decline in the Japanese in ation rate relative to the US in ation rate.

(e)  (5 pts) The growth rate of real output in the US increases relative to growth in Japan. What are the implications for the yen/dollar exchange rate?

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