Reference no: EM1314096

(a) To what extent were monetary factors responsible for the recession of 1981 and 1982? Provide a full analysis and be specific. Please site references where appropriate.

(b) In recent years, the Federal Reserve has made targeting the federal funds rate a main focus of its monetary policy. Define the federal funds rate. If the Federal Reserve wants to lower the federal funds rate, what open-market operation would be appropriate? Explain. Indicate the effect of the open-market operation (that you described above) on the nominal interest rate. Assume that the Federal Reserve\'s action results in some inflation; what would be the impact of the open-market operation on the real rate of interest? Explain. Using a correctly labelled graph of the money market, show how this open-market operation will affect each of the following: (i) Money supply (ii) Interest rate. Please site references where appropriate and add any corresponding charts and graphs within this document as no attachments outside this document will be graded.

 (c) Assume that the bank receives a cash deposit of $9,000 from a customer. What is the immediate impact of this transaction on the money supply? Explain. Suppose that the reserve requirement is 10% and banks voluntarily keep an additional 10% in excess reserves. Calculate: (i) The maximum amount by which this bank will increase its loans from the initial $9,000 deposit. (ii) The maximum increase in the money supply that will be generated from the deposit based on the amount the bank has to loan out. Assume that the government increases spending by $9,000, which is financed by a sale of bonds to the Federal Reserve, explain what will happen to both the money supply and money demand. Using a correctly labeled graph of the money market, show how the open-market sale of bonds will affect the money supply and money demand. Fully explain all effects.