03 Jun Question Analyze very briefly.
Question
Analyze very briefly.
1) Suppose the CFO of a German corporation with surplus cash flow has 1 million Euros to invest. Suppose that interest rates on 1-year CD deposits in US banks are 2%, while rates on 1year CD deposits denominated in euros in German banks are currently 4.5%. Suppose further that the CFO expects that the (euro/$) exchange rate will increase from 1euro per $ to 1.1 euros per $ during the coming year. Should the CFO invest in CD’s denominated in dollars or in euros? Show your work to substantiate your response as credible! 5 pts.
2) Explain why the Fed must normally add reserves to the banking system via open market operations on most days in order to maintain its interest rate target in the Fed Funds market. You refer to its current reduction in the federal fund rate cut to 0.25% that you have seen in recent months. 5 pts.
3) Visit the home page of the Federal Reserve Systems of the central bank of US at www.federalreserve.gov and read the key objectives of the Fed to stabilize the macroeconomic crises of the US economy (you have to look for the links from the home page of the Fed’s websiste- click on the tab “About the Fed” and read through the contents). Based on the information on monetary policy objectives and tools, answer the following question 3A.
For: Policy objectives/purpose: The specific url under the tab about the Fed (Item2): http://www.federalreserve.gov/pf/pf.htm
For Policy tools: The specific url under the tab Monetary Policy is (the listed thread is policy tools): http://www.federalreserve.gov/monetarypolicy/default.htm
Under that, find the link for Mission
3A) What are the key objectives and what are the conventional monetary policy tools does the Fed use to achieve those objectives? 5 pts.
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3B) Read the speech of the Fed Chairman Ben Bernanke he delivered on Oct 18, 2011 at the Federal reserve bank of Boston, which is available at this url link http://www.federalreserve.gov/newsevents/speech/bernanke20111018a.htm
After reading the contents of his speech topic, “The Effects of the Great Recession on the Central Banks’ Doctrine and Practice”, critically and briefly analyze the direction of changes in monetary policy practice of the Federal Reserve from its conventional monetary policy framework in the wake of the great recession the US economy currently faces. 5 pts
4) In the first quarter of 2009, President Obama pushed his massive fiscal stimulus package of $862 (It was originally at $787 billion) through the Congress and later passed by the House and the Senate, whose centerpiece was spending most of this stimulus funds in repairing and building infrastructure in transportation, healthcare, science and technology, and education. Obama also urged to make a modest tax cut for middle-income families making a household income less than $250K per year. The push for this combined package of spending and partial tax cut was also criticized by several opponents in politics, academia, and businesses on the ground that the spending was too large under government financing to balance the growing budget deficit and debt that might threaten future economic stability of the country.
4) A) What possible macroeconomic arguments might President Obama use to defend his $862 billion fiscal stimulus package as a part of his economic recovery plans? 5 pts.
B) Why do you think the critics were so much concerned that this stimulus package might be bad economic policy, and not just for the US, but for the world economy? Does it sound to have a trickle down adverse effect in the current or future financial stability in the US and the World economy, say later in 2011? Do you think this issue is also related to the current political rhetoric between the GOP and Democrats on raising the debt ceiling over $16 trillion? (New debt ceiling proposed by Pres. Obama on Jan 12, 2012: http://www.foxnews.com/politics/2012/01/12/obama-requests-12t-increase-in-debt-ceiling/)? 5 pts.
C) What would happen to the growth rate of the money supply if foreigners lost confidence in the US dollar as a result of recent financial crisis in the US economy and the Fed was trying nonetheless to maintain its current historic low federal funds rate target? Explain briefly. 5 pts.
d)Using the Keynesian Cross model diagram (The diagram with 45 degree line by splitting AD (C+I+G+NX) on the vertical axis and RGDP on the horizontal axis, See in Ch. 9,10 & 13 of the textbook) and equation, critically and briefly illustrate the short run and long run economic impact of Obama’s stimulus package of $862 billion. (Hint: The impact will be in terms of major macroeconomic variables of US economy such as GDP growth, unemployment rate, interest rates, and inflation.) 5 pts.
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