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10-Short-Answer-Questions Monetary-Policy
Money and Banking (Trường Đại học Ngoại thương)
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TCHE 303 – MONEY AND BANKING
TUTORIAL 10
1. If the manager of the open market desk hears that a snowstorm is about to strike New
York City, making it difficult to present checks for payment there and so raising the float,
what defensive open market operations will the manager undertake?
 The snow storm would cause float to increase, which would increase the monetary base. To
counteract this effect, the manager will undertake a defensive open market sale.
2. During the holiday season, when the public’s holdings of currency increase, what
defensive open market operations typically occur? Why?
 An increase in currency holdings causes the currency ratio to rise andthe money multiplier
to fall. As a result, there will be a decrease in themoney supply. To maintain the money supply,
the Fed must make adefensive purchase of bonds on the open market, raising the monetarybase
to counter the decline in the multiplier.
3. If the Treasury pays a large bill to defense contractors and as a result its deposits with the
Fed fall, what defensive open market operations will the manager of the open market
desk undertake?
 When the Treasury's deposits at the Fed fall, the monetary base increases. Tocounteract this
increase, the manager would undertake an open market sale.
4. Suppose, one morning, the Open Market Trading Desk drastically underestimates the
demand for reserves when deciding the quantity of reserves to supply to the market.
Based on analysis of the market for bank reserves, explain why the market federal funds
rate will not exceed the discount rate regardless of how large the gap between estimated
and actual reserve demand.
 If the actual demand for reserves were larger than the estimated demand, the actual reserve
demand curve would be farther to the right than the estimated demand curve. If the gap is large
enough, the demand and supply curves for reserves would intersect on the horizontal portion of
the reserve supply curve. As banks can get whatever quantity of reserves they need through
discount loans, they will not be willing to borrow in the federal funds market at a rate above the
discount rate. Therefore, no matter how great the underestimate of reserve demand, the market
federal funds rate will not rise more than 100 basis points above the target.
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5. Consider a situation where reserve requirements are binding and the central bank decides
to reduce the requirements. How would the Open Market Trading Desk act to maintain
the interest rate target, assuming the demand for excess reserves remains unchanged.
 If required reserves fell with no change in desired excess reserves, then demand for
reserves
would fall. To hit the target federal funds rate, the Open Market Trading Desk would carry out
open market sales to reduce the supply of reserves until the supply and demand curves for
reserves intersected at the target rate.
6. In a graph of the market for bank reserves, show how the Federal Reserve limits
deviations of the market federal funds rate from its interest rate target under the channel
system. Next, show how the Open Market Trading Desk would implement a decision by
the FOMC to raise the target federal funds rate. Assume that the Fed alters the discount
and deposit rates to maintain fixed spreads between them and the target federal funds
rate.
 In the graph, the initial target interest rate, discount rate, and deposit rate are indicated. Were
the reserve demand curve to shift sufficiently rightward to intersect the horizontal portion of
the reserve supply curve, banks would borrow from the Fed rather than pay a higher interest
rate in the open market. Similarly, the deposit rate (the interest rate that the Fed pays on
reserves) sets a floor under the market federal funds rate, as banks will not be willing to lend
funds to each other at a rate below what they can earn from depositing those funds at the Fed.
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In this way, the discount and deposit rates establish a channel within which the market fed
funds rate can fluctuate. The width of the channel depends on the importance of interest rate
stability as a goal of the central bank.
 To achieve a higher target for the federal funds rate, the Open Market Trading Desk would
carry out open market sales, shifting the supply of reserves to the left until demand and supply
of reserves intersect at the new target federal funds rate. The corresponding rise in the discount
rate to maintain the 100 basis-point spread means that the supply of reserves becomes perfectly
elastic at a higher rate.
7. “Discount loans are no longer needed because the presence of the FDIC eliminates the
possibility of bank panics.” Is this statement true, false, or uncertain?
 False. First, FDIC insurance only covers the first $100,000 of individual bank deposits.
While most people have dep10osits beneath this threshold, there are significant deposits above
this level that would cause a strain if fears of bank insolvency were to spread. Second, the
FDIC does not have the funds to cover all deposits (even those under $100,000) if there were a
true bank panic with multiple bank runs. Current estimates indicate that the FDIC could cover
1% of insured deposits. The key here is that FDIC is enough if there are only a handful of bank
failures. What Fed discounting does is to stop the spread of a bank panic from the few unstable
financial institutions to the banking system en masse. Without it, a small banking crisis could
easily turn into a massive one as people realize that there’s no w ay the FDIC could insure all
eligible bank deposits.
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8. What are the disadvantages of using loans to financial institutions to prevent bank
panics?
 Providing loans to financial institutions creates a moral hazard problem. If firms know that
they will have access to Fed loans, they are more likely to take on risk, knowing that the Fed
will bail them out if a panic should occur. As a result, banks that deserve to go out of business
because of poor management may survive because of Fed liquidity provision to prevent panics.
This might lead to an inefficient banking system with many poorly run banks.
9. “Considering that raising reserve requirements to 100% makes complete control of the
money supply possible, Congress should authorize the Fed to raise reserve requirements
to this level.” Discuss.
 While it is true that such a move would give the Fed more control of the money supply, the
economic costs of such a policy would outweigh any benefits from greater control. Banks
would be completely out of the business of making loans in this scenario, removing the service
they provide as financial intermediaries. If you wanted to save your money you would have to
directly find someone willing to borrow and vice versa. Both search costs and risk assessment
costs would rise, leading to a significant decline in borrowing and lending. Since investment in
such things as new business, capital equipment, or even education are highly dependant on a
vibrant financial system, we would see the level of investment in this country decline
drastically, leading to much lower economic growth in the future.
10. Compare the methods of controlling the money supply—open market operations, loans
to financial institutions, and changes in reserve requirements—--on the basis of the
following criteria: flexibility, reversibility, effectiveness, and speed of implementation.
 Open market operations used by the central bank to control the money supply in the
economy are more flexible, reversible. It can be altered as the situation changes and thus, faster
to implement than the other two tools. The loans to various financial institutions, even
though not much flexible in nature, but are considered a more effective tool in controlling
money supply as compared to open market operations and reserve requirements. On the other
hand, the changes in reserve requirements are also flexible as the central bank may change it
if required, and the commercial banks need to follow the same, but it also takes a bit to bit of
time to implement, as well as it's not very reversible and flexible either.
11. What are the advantages and disadvantages of quantitative easing as an alternative to
conventional monetary policy when short-term interest rates are at the zero lower bound?
 Advantages: The main advantages specifically over conventional monetary policy is that
conventional policy is ineffective when short term rates are at zero lower bound, but by using
quantitative easing, we can see expansion occur. Moreover, we can purchase intermediate and
long-term securities, which can lead to lower long term interest rates and further increase
money supply and thus lead to expansion.
 Disadvantage: Quantitative easing may not actually lead to expansion because in some
cases when quantitative easing occurs during an economic environment in which case banks
and different financial markets are quite damaged specifically in terms of credit. This means
that these banks, even though there's an increase in the money supply with quantitative easing,
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they're going to hold a lot of that as reserves, which means monetary expansion won't take
place because the money supply will be kind of halted.
12. Why is the composition of the Fed’s balance sheet a potentially important aspect of
monetary policy during an economic crisis?
 Because the Fed can influence interest rates and provide more targeted liquidity.
13. What is the main advantage and the main disadvantage of an unconditional policy
commitment?
 Advantage: It provides a significant amount of transparency and certainty, which makes it
easier for markets and households to make decisions about the future.
 Disadvantage: It represents a tacit commitment by the central bank, which could be
destabilizing if conditions change.
14. “The only way that the Fed can affect the level of borrowed reserves is by adjusting the
discount rate.” Is this statement true, false, or uncertain? Explain your answer.
 False. The Fed could affect the level of borrowed reserves in two ways. First, they could
directly limit the amount of discount loans an individual bank can take out. Second, they
couldreduce non-borrowed reserves to such a point that even with a fixeddiscount rate,
borrowed reserves will rise, as outlined in the diagram below:
Iff
Iff2 = Id
Iff1
RD
RS 1
RS 2
NBR2
R2 NBR1 = R1
(BR = 0)
R
BR = R2 - NBR2
In the diagram above, the Fed cuts non-borrowed reserves by making open-market sales of
bonds. This causes the federal funds rate to rise above the discount rate, prompting banks to
borrow from the Fed. As a result, the total reserves held by banks (R2) will be equal to NBR2
supplied by the Fed and reserved borrowed directly from the Fed (BR).
15. “The federal funds rate can never be above the discount rate.” Is this statement true,
false, or uncertain? Explain your answer.
 Uncertain: In theory, the market for reserves model indicates that once the Fed funds rate
reaches the discount rate, it would never surpass the discount rate since banks would then
borrow directly from the Fed, and not in the Fed funds market, which would prevent the Fed
funds rate from ever rising above the discount rate. However, in practice, the Fed funds rate
can (and has) be(en) above the discount rate. Thus, may occur due to the stigma associated with
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banks borrowing directly from the Fed; e.g., banks may prefer to pay a higher market rate than
to borrow directly from the Fed and incur the perceived stigma. In addition, nonbank financial
institutions, which do not have access to the discount window, can and do participate in the
federal funds market. The extend to which nonbank financial companies participate in the Fed
funds market may mean that the gap when the Fed funds rate is above the discount rate may not
be arbitraged away.
16. “The federal funds rate can never be below the interest rate paid on reserves.” Is this
statement true, false, or uncertain? Explain your answer.
 Uncertain: In theory, the market for reserves model indicates that once the Fed funds rate
reaches the interest rate on reserves, it would never go below this rate since banks could then
earn a risk-free interest rate paid directly from the Fed, rather than loaning excess reserves in
the more risky Fed funds market at an equivalent or lower rate; this should prevent the Fed
funds rate from ever falling below the interest rate paid on reserves. However, in practice, the
Fed funds rate can (and has) be(en) below the interest rate paid on reserves. This is because
nonbank financial institutions, which can’t earn interest on reserves, participate in the federal
funds market and provide a significant amount of funding to the market. The extend to which
nonbank financial companies participate in the Fed funds market may mean that the gap when
the Fed funds rate is below the interest rate on reserves may not be arbitraged away.
17. Why is paying interest on reserves an important tool for the Federal Reserve in managing
crises?
 It allows the Fed to increase its lending as much as it wants without reducing the federal
funds rate.
18. Why are repurchase agreements used to conduct most short-term monetary policy
operations, rather than the simple, outright purchase and sale of securities?
 Repurchase agreements are temporary open market purchases that can be reversed.
 Repurchase agreements allow the Fed to easily adjust open market operations in response to
daily conditions.
19. Open market operations are typically repurchase agreements. What does this tell you
about the likely volume of defensive open market operations relative to the dynamic open
market operations?
 In suggest that defensive open market operations are far more common than dynamic
operations because repurchase agreements are used primarily to conduct defensive operations
to counteract temporary changes in the monetary base.
20. From 1979 to 1982, the FOMC used money growth as an intermediate target. To do so,
the committee instructed the Open Market Trading Desk to target the level of reserves in
the banking system. What was the justification for doing so? Explain why the result was
unstable interest rates. Would you advocate a return to reserve targeting? Why or why
not?
 In 1979, the Fed had to reduce inflation. It would not have been politically acceptable for
the Fed to explicitly raise interest rates to the level required to bring down inflation, so instead
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the Fed targeted reserves. When the Fed attempts to keep the supply of reserves constant,
changes in the demand for reserves change the interest rate, resulting in increased volatility.
Because changes in the interest rate affect the real economy, targeting the federal funds rate is a
much more effective monetary policy than targeting reserves.
21. Federal Reserve buying of mortgage-backed securities is an example of a targeted asset
purchase. Explain how the Fed’s actions are intended to work.
 The Federal Reserve's stated objectives involve controlling the money supply of a country
with the intent to control the economic progress by purchasing mortgage-backed securities
(MBS), the Fed sought to lower mortgage rates in order to increase home sales, raise house
prices, and promote housing construction.
22. The strategy of inflation targeting, which seeks to keep inflation close to a numerical goal
over a reasonable horizon, has been referred to as a policy of “constrained discretion.”
What does this mean?
* Constrained discretion is an approach that allows monetary policymakers considerable
leeway in responding to economic shocks, financial disturbances, and other unforeseen
developments but constrained by a strong commitment to keeping inflation low and stable.
Because the components of inflation targeting are: (1) Public announcement of numerical
target, (2) Commitment to price stability as primary objective, (3) Frequent public
communication. It means that the strategy of inflation targeting increases policymakers’
accountability and helps to establish their credibility but they are also constrained by a strong
commitment to keeping inflation low and stable to reach the objectives that they have
announced to the public. Thus, the results would not only be the simplicity and clarity of a
numerical target for the inflation rate but also usually higher and more stable growth as well.
23. Go to the website of the Federal Reserve Board at www.federalreserve.gov and find the
section describing monetary policy tools. Which unconventional tools employed during
the financial crisis of 2007–2009 has the Fed stopped using? What do you think determined
the order in which various facilities were shut down? Which, if any, of the tools still remain
in operation?
The Fed’s main unconventional tools during the 2007-2009 financial crisis were:

Targeted assistance to ailing financial institutions (STOP USING) (“bailouts”)

Quantitative easing (or Large-Scale Asset Purchases) (IN OPERATION)

Forward guidance about interest rates (IN OPERATION)
The Fed could no longer use interest rates as a management tool of monetary policy after
2009, because these were near zero.
24. The ECB pays a market-based interest rate on required reserves and a lower rate on
excess reserves. Explain why the system is structured this way.
 Paying a market-based interest rate on required reserves reduces the costs to banks of
holding reserves. Paying interest on excess reserves helps sets a floor under the overnight
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lending rate: banks would not lend to each other at a rate below the rate paid on excess
reserves. Unlike the interest rate paid on required reserves, the interest rate paid on excess
reserves affects banks' willingness to hold reserves at the margin, and thereby influences the
interbank lending rate.
25. Based on the liquidity premium theory of the term structure of interest rates, explain how
forward guidance about monetary policy can lower long-term interest rates today. Be
sure to account for both future short-term rates and for the risk premium. How does the
effectiveness of forward guidance depend on its time consistency?
 The liquidity premium theory expresses the long-term interest rate as the sum of average.
When expected future short-term rates plus a liquidity premium credible, forward guidance
influences expectations about future short-term rates. For example, if policymakers credibly
express intent to keep interest rates low for several years, this forward guidance can lower the
sum of average. A low-credible intention to keep rates steady also can lower the risk premium
by reducing interest rate risk. However, if forward guidance lacks time consistency, it also
would lack credibility, making it ineffective. Instead of lowering market interest rate
expectations, investors may simply expect the central bank to renege on the policy commitment
to keep rates and steady in the future.
26. With the policy interest rate at zero, how might a central bank counter unwanted
deflation?
 They could use forward guidance, quantitative easing, and/or targeted asset purchases. The
bank could commit to keeping the policy interest rate at zero until inflation starts to increase.
They could engage in large scale quantitative easing to signal that they are committed to these
low rates.
27. Outline and compare the ways in which the Federal Reserve and the ECB added to or
adjusted their monetary policy tools in response to the financial crisis of 2007–2009 and
the subsequent financial crisis in the euro area.
 Federal Reserve:
+ In July 2007, the Fed pumping liquidity into the system, a month later, its interest rates
were lowered for the first time
+ In September 2007, the Fed lower interest rate from 4,75%  4,5% (late October, 2007)
 4,25% (December, 2007)  3,5% (January, 2008)  3% (the U.S Congress reached an
agreement on tax relief and tax cuts to revive the economy)  2,25% (March, 2008). Since
January 2009, it placed them at 0.05%. At this point, the Fed's interest rates remained in the
range of 0-0.25%.
+ In June 2008, the Fed auctioned 75 billion dollars in loans to help entities with credit
problems.
+ In November 2008, the Fed announced the beginning of the QE (Quantitative
easing) programme. Additionally, the FSB (Financial Stability Board) was created. Its
aim was to analyse the global changes that had to be made in relation to the
international financial system
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+ In December 2008, the U.S. government (at the behest of the president of the Federal
Reserve) doubled its public debt by carrying out a 700 billion dollar bailout to purchase
toxic assets with the notion of reselling them once the situation was stable.
+ In March 2009, US Treasury Secretary also announced the creation of publicprivate partnerships. Popularly called bad banks, these entities were established to
acquire loans and toxic securities in order to sell them on when more favourable
conditions existed.
+ Since 2009, it undertook another set of measures, in the form of Quantitative Easing. Its
first phase, applied from March 2009 to March 2010, had a global cost of 600 billion
dollars and was complemented with two other phases. The second one, from November
2010 to September 2011, which received a total amount of 600 billion dollars, and the third
one from September 2012 to October 2014. Although the liquidity injection has been
declining gradually throughout 2014, all together, the QE phases increased the Fed's
balance to 4 trillion.
 Therefore, between 2007 (the beginning of the liquidity crisis) and 2009, open market
operations and the management of interest rates became the main measures to complement
government actions. However, from 2009, as we have seen before, due to the escalation of
the crisis, the Federal Reserve's ability to employ the interest rates as a reactivating measure
vanished. All those new measures (QE, the establishment of the bad banks and other legal
solutions) were also supplemented with FSB actions, all under the hypothesis of global
risks pressure and the need of international coordination between different actors, states
and/or financial institutions.
 European Central Bank:
+ Mid-2007, the ECB acted through open market operations, but did not change its interest
rates.
+ Early October 2008, the ECB lowered its interest rates, to 3.75%. Between October 2008
and July 2009, the ECB reduced its interest rates eight times (from 4.25% to 1% in May
2009). In July 2011, it increased them again to 1.5% due to the fear of inflationary pressures.
In December 2009, the European Central Bank lowered its interest rates to 1%, reducing
them gradually to 0.05% (September 2014).
+ In May 2009, ECB proceeded with the acquisition of cover bonds (60 billion euros) to
encourage the liquidity of the partially paralyzed market segment responsible for providing
funds to banks. Secondly, it implemented some temporary configuration changes in the
long-term refinancing operation (LTRO). Those expansionary and unconventional measures,
implemented (in its new form) in December 2011 and in February 2012, totalled around 1
trillion euros (National Bureau of Economic Research, 2011)
+ The inadequacy of used mechanisms, the worsening of the sovereign debt crisis within the
euro zone (especially the Greek situation) made the European Central Bank conducts two
covered bank bonds purchase programs (the first one, already mentioned before, applied in
May 2009 and the second one enforced in October 2011 for a total value of 100 billion
euros) and the Securities Markets Programme (SMP) implementation.
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+ The dangerous summer that Spain lived in 2012, the critical economic situation of the
Italian economy and the possible breakup of the euro prompted the president of the ECB to
deliver on July 26 of this year historical statements on safeguarding the stability of the euro
area. Because of this situation, the European Central Bank activated the Outright Monetary
Transactions (OMT) through which it sought to settle financial stability within the euro
zone.
+ Through a process of negotiation and legislation, developed between 2012 and 2013, it
was decided to establish a banking union community with the aim of strengthening the
structure of the Economic and Monetary Union of the EU and to limit potential financial
contagion between different member states.
+ Finally, in late 2014 the European Central Bank adopted two new long-term refinancing
operations (TLTRO).

COMPARISION
FEDERAL RESERVE
1) The Fed withdrew the stimulus plan of QE
by the end of 2014
2) During the crisis, the Fed opted to use
liquidity and lower the interest rates from
August 2007 and to purchase toxic assets from
the market (like other central banks, such as
the Bank of England) from 2008.
ECB
1) The ECB planned to implement its first
phase in early 2015
2) However, the ECB acted like a bank by
injecting market liquidity. Likewise and
according to its mandate, when inflationary
pressures were pointed out, it cut interest rates
in October 2008.
28. How might the Federal Reserve exit from the unconventional policies it employed during
the financial crisis of 2007–2009 without causing inflationary problems?
 The Fed could tighten monetary policy without selling assets by raising the deposit rate it
pays on reserves. As the deposit rate sets a floor to the market funds rate, the fed funds rate
would rise to this level even if reserve supply is unchanged.
29. The central bank of a country facing economic and financial market difficulties asks for
your advice. The bank hit the zero bound with its policy interest rate, but it wasn’t
enough to stabilize the economy. Drawing on the actions taken by the Federal Reserve
during the financial crisis of 2007–2009, what might you advise this central bank to do?
 You should advise the central bank to use unconventional monetary policy tools such as
quantitative easing, where aggregate reserves are provided beyond the level needed to lower
the policy rate to zero, or credit easing, a policy in which the central bank alters the
composition of its balance sheet. The central bank could also inform markets of its commitment
to keep interest rates low (forward guidance).
30. Suppose ECB officials ask your opinion about their operational framework for monetary
policy. You respond by commenting on their success at keeping short term interest rates
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close to target but also express concern about the complexity of their process for
managing the supply of reserves. What specific changes would you suggest the ECB make
to its system in the future?
 You might suggest that the ECB concentrate its operations in Frankfurt instead of having to
coordinate these operations at all the national central banks simultaneously. You might also
suggest that the ECB narrow the relatively long list of institutions that qualify as counterparties
to open market operations and reduce the range of assets it accepts as collateral for these
operations.
31. Why might inflation targeting increase support for the independence of the central bank
to conduct monetary policy?
 Sustained success in the conduct of monetary policy as measured against a pre-announced
and well-defined inflation target can be instrumental in building public support for a central
bank's independence and for its policies. Also inflation targeting is consistent with democratic
principles because the central bank is more accountable.
32. ‘Because the public can see whether a central bank hits its monetary targets almost
immediately, whereas it takes time before the public can see whether an inflation target is
achieved, monetary targeting makes central banks more accountable than inflation
targeting does.’ Is this statement true, false, or uncertain? Explain your answer.
 Uncertain. If the relationship between monetary aggregates and the goal variable—say,
inflation—is unstable, then the signal provided by the monetary aggregates is not very useful
and is not a good indicator of whether the stance of monetary policy is correct.
33. ‘Because inflation targeting focuses on achieving the inflation target, it will lead to
excessive output fluctuations.’ Is this statement true, false, or uncertain? Explain your
answer.
 False. Inflation targeting does not imply a sole focus on inflation. In practice, inflation
targeters do worry about output fluctuations, and inflation targeting may even be able to reduce
output fluctuations because it allows monetary policymakers to respond more aggressively to
declines in demand because they don't have to worry that the resulting expansionary monetary
policy will lead to a sharp rise in inflation expectations.
34. ‘A central bank with a dual mandate will achieve lower unemployment in the long run
than a central bank with a hierarchical mandate in which price stability takes
precedence.’ Is this statement true, false, or uncertain?
 False. There is no long-run trade-off between inflation and unemployment, so in the long
run a central bank with a dual mandate that attempts to promote maximum employment by
pursuing inflationary policies would have no more success at reducing unemployment than one
whose primary goal is price stability.
35. What is the main rationale behind paying negative interest rates to banks for keeping
their deposits at central banks in Sweden, Switzerland, and Japan? What could happen to
these economies if banks decide to loan their excess reserves, but no good investment
opportunities exist?
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 The rationale behind that idea is to encourage banks to create loans, as opposed to keep their
excess reserves idle at central banks. One can think that if banks are somewhat "forced" to
create loans when economic conditions are uncertain, it might result in funds being
misallocated, and creating another sort of problems. For example, if banks create loans without
the desirable mix of liquidity, term and risk, banks might be in trouble in the future, which also
constitutes a problem for central bankers.
36. In early 2016 as the Bank of Japan began to push policy interest rates negative, there was
a sharp increase in safes for homes in Japan. Why might this be, and what does it mean
for the effectiveness of negative interest-rate policy?
 It can stimulate the economy by increasing consumption and borrowing and penalizing
saving in the form of deposits.
 It can destabilize the banking system, decrease liquidity in the banking system, and reduce
the amount of money available for lending in the banking system.
NOTE
1) The change in INTEREST RATE PAID ON EXCESS RESERVES (1) and DISCOUNT RATE
(2) has NO effect on the iff when (1) and (2) has the rate totally different from that of iff but has
EFFECT when it’s has the rate partially identical to that of iff (positive)
For example:
+ Everything else held constant, in the market for reserves, when the federal funds rate is 3%,
lowering the discount rate from 5% to 4%  has no effect on the federal funds rate.
+ Everything else held constant, in the market for reserves, when the federal funds rate is 5%,
lowering the discount rate from 5% to 4%  lowers the federal funds rate.
2) If iff IOER: The demand curve for reserves is DOWNWARD SLOPING
If iff IOER: The demand curve for reserves is HORIZONTAL
3) If iff id : the supply curve of reserves is VERTICAL
If iff id : the supply curve of reserves is HORIZONTAL
4) FLOAT  bad weather  increase  defensive OM sale (drain)
FLOAT  good weather  decrease  defensive OM purchase (inject)
5) TREASURY DEPOSIT  increase  defensive OM purchase (vice versa)
6) CURRENCY HOLDINGS  rise  OM purchase to offset the expected decrease in
reserve. (vice versa)
7) Taylor Rule’s:

Federal funds rate target = equilibrium real federal funds rate + inflation rate +
1/2 (output gap) + 1/2 (inflation gap)
+ Inflation rate = Actual Inflation rate
+ Output gap = expected GDP growth rate - long-term GDP growth rate
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+ Inflation gap = expected (actual) inflation rate - target inflation rate
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