ECO 375

Homework #1
Due 2/18/10 at 7:15 pm in class

Short Answer:

1. Briefly describe the origin of the Federal Reserve System. Describe the functions of the
Fed district banks.
2. What are the main goals of the Federal Open Market Committee? How does it attempt to
achieve these goals?
3. Explain how the Fed increases the money supply through open market operations.
4. How is money supply growth affected by an increase in the reserve requirement ratio?
5. Calculate the Taylor Rule prescribed policy rate according to the following information:

Form of Taylor Rule: Target fed funds rate = 2.07% + 1.28 x inflation – 1.95 x excess
unemployment (http://www.frbsf.org/publications/economics/letter/2009/el2009-17.html)

Current Inflation: 1.4%

Current Excess Unemployment: 4.9%

6. When does the Fed use a loose-money policy and when does it use a tight-money policy?
What is a criticism of a loose-money policy? What is the risk of using a monetary policy
that is too tight?
7. Compare the recognition lag and the implementation lag.
8. Describe the Fed’s monetary policy response to the credit crisis. Why might normal
policy transmission channels break down during a credit crisis?
9. Explain why the Fed’s monetary policy could be dependent on the fiscal policy that is
implemented.