Q1. Briefly describe the structure of the Fed in its operational authority in conducting monetary policy of the economy. Do you think the Fed operates its monetary policy with full independence without political pressure from the US Congress or the White House? Why or why not?
Q2. Distinguish between the federal funds rate and the discount rate. Why do you think changes to the discount rate are less effective than changes to the federal funds rate?
Q3. If the Fed makes a massive purchase of Treasury securities, how will this purchase affect the equilibrium interest rate in the federal funds market? Illustrate your explanation with a demand and supply diagram of the federal funds market.
Q4. Suppose there is a massive withdrawal of deposits by households and business entities (a run on a bank) caused by a rumor of the bank’s financial insolvency. What would be the effect of this event on short-term interest rates? If the Fed wants to intervene to prevent this, what would be the appropriate action?
Q10. Critically describe how the OMO (open market operations) of the Fed can be used to affect the following activities of macroeconomics:
10a. Federal funds rate
10b. Money market interest rate
10c. Inflation rate
10d. Consumption expenditure
10e. Investment expenditure
10g. Employment and output (RGDP)