Reference no: EM132337655

1) Visit this news below in the Federal Reserve website and read the entire transcript of the speech given given by the Fed's Chair Jay Powell on Feb 27, 2019 at the US Congress regarding the US monetary policy perspective in the context of the current state of the economy. After highlighting his key points on monetary policy measures, critically give his key recommendations for monetary policy to cope up with future challenges by the Fed to fine tune the economy in the face of possible inflation pressure in near future given the full employment state of the economy.

News Testimony - Semiannual Monetary Policy Report to the Congress by Chairman Jerome H. Powell

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

2) Suppose the CFO of an American corporation with surplus cash flow had $100 million to invest last July 15 and the corporation did not believe it would need to utilize these funds to retool or expand production capacity for 1 year. Suppose further that the interest rate on 1-year CD deposits in US banks was .5%, while the rate on 1 year CD deposits in England (denominated in British Pounds) was 2% at the time. Suppose further that the exchange rate at that time was $1.68 per British pound.

A) Suppose that now a year later the exchange rate is $1.55 per US pound. What rate of return did the CFO earn on the investment in the British CD?

B) What must the CFO have expected about the value of the British pound in $ today to believe that investment in British CD's was more profitable than investment in US CD's last July?

3) Between February 2008 and Summer 2009, the Fed supplemented its open market operations with a greatly expanded program of direct lending (both overnight and short term 28, and 84-day loans) to commercial banks, investment banks, brokerage and primary dealer units of bank holding companies. It also agreed to accept a wider range of short- term securities (instead of accepting only T-Bills) as collateral on these loans and even initiated a program to buy commercial paper from money market funds.

Explain why the Fed created all these extraordinary direct lending facilities instead of simply relying on traditional open market purchases of Treasury securities.

4) As conditions in short term financial markets improved by summer of 2009 the Fed closed down its lending under these programs mentioned in Q3 above. However, throughout the next 4 years the Fed increased substantially its purchases of longer term mortgage backed securities and Treasury notes from banks in a series of 3 "Quantitative Easing" (QE1, QE2, and QE3) Programs.

A) Assume that both lender & borrower confidence levels start to return to normal and financial and physical investment levels start to rise much more strongly in the next 12 months than in the last few years. What potential problems will the extraordinary growth in banks' reserve deposits and in the size of the Fed's portfolio of longer-term Treasury and Mortgage backed bonds that has resulted from 3 rounds of Quantitative Easing create then for the Fed?

B) What relatively untested policy tools will help the Fed deal with this problem? Explain.

5) In late last year starting from November 2018, the stock markets in the Wall Street has shown an unexpected level of ups and downs (with almost wiping out 2018 gains in equity market) mainly attributed to the uncertainty caused by Trump's Trade War policy with China and EU, falling oil prices, and other possible cutting govt. programs (in an effort to reduce budget deficit). In the process, the value of the $ has also shown a high degree of volatility against the Euro, the Yuan (Renminbi), yen and many other major currencies.

A) Given the current condition of the US economy, do you think US policy makers would prefer to see the $ rise in value, decline in value or stay at its current value? Discuss the advantages and disadvantages to the US economy at this time of a stronger vs. a weaker $. Frame your answer in terms of the current Aggregate Demand and Aggregate Supply situation of the US economy. 4pts

B) Draw an AS/AD diagram to illustrate your answers for Question A) above. Clearly label axes and the current position of AS & AD relative to full employment RGDP....also indicate any shifts that would occur if the exchange rate of the $ rose sharply against other major currencies 3pts.

6) Each year since winning control of the House of Representatives in the 2010 election, Conservative wing of Republicans have argued that we need to immediately initiate sharp reductions in government spending and entitlement programs and rapidly move towards a balanced budget, (although they have never actually produced a budget proposal in which tax revenues would match government spending plus entitlement transfers). Many Democrats, while arguing that tax rate increases on high income earners need to be part of the any deficit reduction program, have agreed that we need to initiate budget deficit reduction now. However, under the current Trump Administration, the tax reform implemented in 2018 was just the reverse of what democratic party views on taxes. Citizens for Tax Justice (CTJ) have made an estimate of how much these tax reform approved by by the GOP led Congress would impact the existing budget deficit crisis already. According to their estimate, this reform would yield tax revenues of only $1.1 trillion. The Office of Management and Budget (OMB) estimated that the federal government would raise an estimated $2.5 trillion and spend $5 trillion in 2018. Another estimate by independent research organizations and government agencies predict that the federal budget deficit might increase by $1 trillion in 2018-2019 budget year. Given this reality, would result which of the following outcomes?

A) What is the argument against attempting to balance the Federal Government budget rapidly at the present time via either deep cuts in Federal Government spending or sharp increases in federal income tax rates?

B) Does this argument imply that budget deficits don't matter in the long run? If not, why might the impact of large deficits predicted in the long run under current tax and spending programs be different than the impact today? Explain.