Money and Bank Questions
ANSWER
Question 1: Stanley Fischer’s Concerns about Low Natural Rate of Interest
- Natural Rate of Interest: The natural rate of interest is the theoretical interest rate that would prevail in an economy when it is operating at full potential or the equilibrium level of output, and there is neither inflationary nor deflationary pressure. It represents the real return required by savers and the real cost of borrowing for businesses and individuals.
- Use in Monetary Policy: Central banks, like the Federal Reserve, use the natural rate of interest as a benchmark to set their policy interest rates. When the actual interest rates are below the natural rate, it encourages borrowing and spending, stimulating economic activity. Conversely, when actual rates are above the natural rate, it might discourage borrowing and spending to control inflation.
- Concerns About Low Natural Rate of Interest: Stanley Fischer might be concerned about a persistently low natural rate of interest due to several reasons:
- Limited Monetary Policy Space: With interest rates already low, central banks have less room to lower rates further in response to economic downturns.
- Economic Stimulus Challenges: Low rates might be less effective in stimulating economic activity as they are already near or below the natural rate.
- Savings Challenges: Low rates can discourage savings, potentially impacting long-term investment and retirement planning.
- Financial Stability Risks: Persistent low rates might lead to search for higher yields, increasing the risk of asset bubbles and excessive risk-taking.
Question 2: Concerns about High Excess Reserves and Monetary Base Increase
- Issue of High Excess Reserves: High excess reserves can signal that banks are not lending money as much as expected. This means that the money injected into the banking system isn’t being fully utilized to stimulate economic activity.
- Economic Implications of Dramatic Monetary Base Increase: A dramatic increase in the monetary base could potentially lead to several issues:
- Ineffective Monetary Transmission: If banks don’t lend out the increased reserves, the money injected might not reach the broader economy to stimulate spending.
- Inflation Risk: If the increased monetary base leads to a rapid expansion of the money supply without corresponding increases in real economic output, it could lead to inflation.
- Concerns About Inflation: Yes, there could be concerns about inflation resulting from a large increase in the monetary base. If the increase in the money supply (through lending) outpaces the growth in real economic output, it could lead to demand-pull inflation.
Question 3: Calculating Money Multiplier and Money Supply Increase
- Calculate Money Multiplier: Money Multiplier = M1 Money Stock / Adjusted Monetary Base. You can find these values on the FRED website.
- Calculate Money Supply Increase: Money Supply Increase = Change in Monetary Base * Money Multiplier.
- Consistency with Expectations: The increase in the money supply is consistent with expectations based on the money multiplier. If the multiplier is accurate, an increase in the monetary base should lead to a proportional increase in the money supply.
Remember to perform these calculations using the most recent data available on the FRED website to provide accurate answers.
Question Description
I’m working on a Economics question and need guidance to help me study.
1.In “Low Interest Rates,” Stanley Fischer outlines several reasons why we might be concerned about a persistently low natural rate of interest.(250 words)
- Define the natural rate of interest
- Explain how it is used in monetary policy
- Discuss the reasons why Fischer is concerned that it has been persistently low
2.In “Where the Newly Created Money Went,” David Price explains the concerns that some economists in the Federal Reserve have about the volume of excess reserves that were created in response to the financial crisis.(250 words)
- What is the issue of high excess reserves?What could go wrong in the economy because the monetary base was increased so dramatically?
- Should we be concerned about inflation resulting from such a large increase in the monetary base?
3.Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and find the most recent values for the M1 Money Stock (M1SL) and the St. Louis Adjusted Monetary Base (AMBSL).
- Using these data, calculate the value of the money multiplier
- Assuming that the multiplier is equal to the value computed in part (a), if the monetary base increases by $400 million, by how much will the money supply increase?
- Is this consistent with what you would have expected?Explain