Question

The Federal Reserve Bank is worried about an increase in the interest rate due to federal...

The Federal Reserve Bank is worried about an increase in the interest rate due to federal government budget deficits. What can the Federal Reserve do to offset the increase in the interest rate? What is the tradeoff of offsetting the increase in the interest rate?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The aim of the federal reserve should be to reduce the rate of interest. This can happen when the federal reserve

  • Conduct open market purchase of government securities and increase the bank reserves
  • reduce the required reserve ratio in order to increase bank reserves
  • Reduce the discount rate to increase bank reserves

Increasing bank reserves is important because it will increase loan generation and put a downward pressure on the interest rate.

The obvious trade-off is an increase in the price level which means higher inflation. It may also destabilizes the output because lower interest rate will increase investment and increase aggregate demand.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
If both the Reserve Bank of Australia and the Federal Government are attempting to increase economic...
If both the Reserve Bank of Australia and the Federal Government are attempting to increase economic growth, the proper policies would be for the RBA to: Select one: a. raise interest rates and the Federal Government to increase government expenditure. b. reduce interest rates and the Federal Government to raise taxes. c. raise interest rates and the Federal Government to reduce government expenditure. d. reduce interest rates and the Federal Government to reduce taxes
The main interest rate that the Federal Reserve tries to control is the Federal Funds rate,...
The main interest rate that the Federal Reserve tries to control is the Federal Funds rate, the interest rate that banks charge on short-term (usually overnight) loans to other banks. Let’s see how much interest a bank can earn if it lends money at the Federal Funds rate. Virginia Community Bank has $2,000,000 of extra cash sitting in its account at the Federal Reserve Bank of Richmond. It gets a call from Bank of America asking to borrow the whole...
In March 2018, the Federal Reserve Bank officials met and decided to increase the interest slightly...
In March 2018, the Federal Reserve Bank officials met and decided to increase the interest slightly (a quarter of one percent) and have hinted that there will be two or more interest hikes in 2018. The reason for these hikes is to prevent the economy from overheating as unemployment continues to drop. Using AD-AS model, show what could happen to the economy if the Fed hiked interest rate when the economy is close to full employment.
What is the purpose (mandate) of the federal reserve bank? What does the federal reserve bank...
What is the purpose (mandate) of the federal reserve bank? What does the federal reserve bank do? How does the federal reserve bank carry out its function?
With a large and growing deficit, the Federal Reserve may face pressure from the federal government...
With a large and growing deficit, the Federal Reserve may face pressure from the federal government to enact monetary policy. What monetary policy would the federal government want the FED to enact in response to an increase in government debt? What is the tradeoff of this monetary policy?
2) A spike in “All Other Outlays” of the federal government in 2009 was due to:...
2) A spike in “All Other Outlays” of the federal government in 2009 was due to: a) an increase in the financial aid given to Greece earlier that year. b) an increase in the expenditures on Social Security and Medicare. c) the fiscal stimulus package passed earlier that year. d) a sudden increase in military expenditure as a result of the war in Iraq. e) an increase in the national debt earlier that year. 3) In 2016, welfare spending accounted...
The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital...
The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital budget decision tools, discuss how decreasing interest rates can cause firms to make more investments.
The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital...
The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital budget decision tools, discuss how decreasing interest rates can cause firms to make more investments.
The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital...
The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital budget decision tools, discuss how decreasing interest rates can cause firms to make more investments.
The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital...
The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital budget decision tools, discuss how decreasing interest rates can cause firms to make more investments. (Use references if possible)
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT