Q1.What are the three tools the Federal Reserve uses to change the money supply and insert rates in the economy?Which of these tools is most important and why? Q2.On the Federal Reserve Web site...

Q1. What are the three tools the Federal Reserve uses to change the money supply
and insert rates in the economy? Which of these tools is most important and why?
The three tools that the Federal Reserve uses to change the supply of money and insert rates in
the economy are:
 the Open Market Operations: The open market operations involve a buying and selling
of government securities by the Federal Reserve Bank of New York on the open
market. Buying of government securities from. the banks increases the supply of
money in the economy while a selling of government securities does the reverse.
 changes in the short-term interest rate, called the federal funds rate or the Funds Rate:
An increase in the supply of reserves decreases the fund rate and vice-versa.
 changes in the discount rate: This is the rate at which the banks directly bo
ow
eserves from the Federal Reserve Bank at its discount window.
Of these three the open market operations are most commonly used since they
ing about
marginal changes in the supply of money in the economy at a time, and thus have manageable
impact on the economy, as compared to changes in the Fed rate or the discount rate which
ing about a sudden and massive changes in supply of money.
Q2. On the Federal Reserve Web site (www.federalreserve.gov/FOCM
eigebook),
find the latest version of the Beige Book that summarizes economic conditions in your
Federal Reserve district. Summarize those conditions and relate them to cu
ent
FOMC policy.
The conditions in Dallas according to the Beige Book looks upbeat with prices overall stable,
employment levels were either unchanged or increasing in some firms, such as oil services,
auto dealers, airlines, machinery firms, food and high-tech manufacturers and transportation.
Besides, demand has been high for construction-related materials, business services etc. Also
sales of non-seasonal items like home furnishings and menswear remained strong. Agriculture
also showed goods growth due to improved weather conditions. Energy-related service firms
are reporting strong demand, financial firms also are reporting modest pickup in loan demand,
housing demand continues to remain firm and the demand for business services is also solid.
These conditions in Dallas are in turn a lagged impact of the expansionary monetary policies
pursued by the government to pull the economy out of the sub-prime lending economic crisis
of 2008-09.
Q3. A change in the real money supply can result either from a change in the nominal
money supply through Federal Reserve policy (holding the price level constant). The
change in the nominal money supply causes a shift of the aggregate demand curve,
whereas a change in the price level causes a movement along the aggregate demand
curve. Explain.
The aggregate demand curve is drawn on the assumption of a given level of nominal money
supply and a given level of household consumption, government expenditure, investment and
net exports. Any change in either of these causes a shift in the AD either to the right or left. An
increase in the nominal money supply decreases the rate of interest and thereby boosts
investment in the economy. This in turn increases the level of output demanded at a given
price level (P2) from Y1 to Y2 and hence the AD curve shifts outwards to AD2.
Price level Long run AS curve
P2 B
AD2
P1 A AD1
Y1 Y2 output
On the other hand, an increase (or decrease) in the price level from P1 to P2 does not change
the level of autonomous investment or consumption and government expenditure. Hence there
is in no shift in the AD curve. There is only a movement up (down) the AD curve from A to B.
Q4. Find one or more articles in the Wall Street Journal or other business publications
that describe changes in fiscal and monetary policies in the United States. Discuss
how these policies relate to the model of aggregate demand and aggregate supply
and the issues involved...