2) Suppose the CFO of an American corporation with surplus cash flow had $100 million to invest last July 15 and the corporation did not believe it would need to utilize these funds to retool or expand production capacity for 1 year. Suppose further that the interest rate on 1-year CD deposits in US banks was .5%, while the rate on 1 year CD deposits in England (denominated in British Pounds) was 2% at the time.

1. Visit the url link below:
https://www.federalreserve.gov/newsevents/testimony/powell20201201a.htm
and read the testimony of the Fed Chair Jeremy Powell given at the US
Congress on Dec 1, 2020 about the state of the economy and its policy
implication amid Covid-19 crisis.
Question: After reading the transcript of the testimony, briefly analyze the
highlights of the policy challenges he described and what policy strategies
the Fed would take continue the recovery if the economy while Covid-19
crisis is still on the rise.
Note: If the url does not show up, you may go to federalreserve.gov and click on
news and events then look for testimony for Dec 1, 2020. 5 Points
2) Suppose the CFO of an American corporation with surplus cash flow had $100 million
to invest last July 15 and the corporation did not believe it would need to utilize these funds
to retool or expand production capacity for 1 year. Suppose further that the interest rate on
1-year CD deposits in US banks was .5%, while the rate on 1 year CD deposits in England
(denominated in British Pounds) was 2% at the time. Suppose further that the exchange
rate at that time was $1.68 per British pound.
A) Suppose that now a year later the exchange rate is $1.55 per US pound. What
rate of return did the CFO earn on the investment in the British CD? (Note: a
specific numeric answer is required for full credit.) 4pts.
B) What must the CFO have expected about the value of the British pound in $
today to believe that investment in British CD’s was more profitable than
investment in US CD’s last July? 3pts
3) On March 15, 2020 the Federal Reserve’s open market committee (the FOMC) has
suddenly decided to lower the federal fund rate to zero and ¼ of 1% amid the Corona virus
outbreak. This is the lowest interest rate at virtually zero since similar measures they had
to take in 2010 to recover from 2008 Great Recession, Visit the url link below to read the
statement to answer the question followed.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm
The conventional monetary policy approach for effective policy objectives to achieve full
employment by expanding the money supply aggressively during severe recession. Since
the US economy has been hit hard by Covid-19 pandemic, the economy suddenly dropped
from its best record of unemployment rate in 50 years to one of the worst conditions of
losing job over 3-4 millions per week in March and April 2020.
Question: After reading the transcript of the FOMC monetary policy statement about
this extraordinary effort to the economic rescue, briefly but clearly explain the
transmission mechanism how this lowest possible federal fund rate change would
positively impact the current declining economy and jobs. 4 pts
Hint: Please read relevant monetary policy actions and its effect in the textbook chapter to
take the right approach.
4. From your theoretical knowledge on the concept about the reserve requirement policy
of the Fed in bank deposit and money creation in bank’s lending process, read the transcript
in the url link below posted by the Federal Reserve on March 15, 2020. At the bottom of
the transcript, the Fed announced the reserve requirement to zero for all bank deposits, a
major departure from its years of unchanged policy on reserve requirement.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm
Briefly explain the reason for reducing the reserve requirement to zero% and its
potential effect on macroeconomic fundamentals during this economic downturn
caused by COVID-19 pandemic.
4) Assume the recovery process of the current depressed economy is expected to start after
ending the Covid-19 crisis presumably late Fall of 2020. Under the conditions in short term
financial market crisis and the economic recession in coming summer and fall of 2020, the
Fed has expanded a massive easy lending program on April 9, 2020 under the statement
below:
The Federal Reserve on Thursday took additional actions to provide up to $2.3 trillion in
loans to support the economy. This funding will assist households and employers of all sizes
and bolster the ability of state and local governments to deliver critical services during the
coronavirus pandemic.
“Our country’s highest priority must be to address this public health crisis, providing care for
the ill and limiting the further spread of the virus,” said Federal Reserve Board Chair Jerome
H. Powell. “The Fed’s role is to provide as much relief and stability as we can during this
period of constrained economic activity, and our actions today will help ensure that the
eventual recovery is as vigorous as possible.”, the press release stated. The url link to read
the transcript is below:
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm
This policy measure is similar to the quantitative easing policy the Fed took during the
recovery process of 2008 Great recession.
Question 4A: From your knowledge on this topic from this course learning, briefly
but critically explain how this massive loan of $2.3 to support the financial institutions
and households of all sizes would help recover the economy without accelerating
inflation. Is the theory of the Phillips Curve (inflation-unemployment trade off ) you
have learned in this course relevant in this context? Why or why not? 4pts
Question 4B: What relatively untested policy tools will help the Fed deal with the
potential problem of printing so much money as soon as the pandemic crisis over?
Explain. 4pts.
(Hint: you may wish to look at www.federalreserve.gov then click monetary
policy…then Policy Normalization: principles and Plans). You may also read relevant
chapters in the textbook.
5) Since the outbreak of Covid-19 virus in the US in March 2020 and continuous fall in
crude oil price to its 1973 level, the stock markets in the Wall Street has shown an
unexpected level of ups and downs after several times of stock market crash (with almost
wiping out 2019-20 gains in equity market) until recently the stock price went up to record
in its history. In the process, the value of the $ has also shown a continuous decline in Fall
2020 against the Yuan (Renminbi), euro, yen and many other major currencies. However,
in the first quarter of 2021, if the economy rebounds, the stock market prices are expected
to rise at a very high rate of growth.
5A. Given the expected rebound of the US economy, do you think US policy
makers would prefer to see the $ rise in value, decline in value or stay at its current
value? Discuss the advantages and disadvantages to the US economy at that time
of a stronger vs. a weaker $. Frame your answer in terms of the current Aggregate
Demand and Aggregate Supply situation of the US economy. 4pts
5B. Draw an AS/AD diagram to illustrate your answers for Question A) above.
Clearly label axes and the current position of AS & AD relative to full employment
RGDP….also indicate any shifts that would occur if the exchange rate of the $
rose sharply against other major currencies 4pts.
6) Each year since winning control of the House of Representatives in the 2010 election,
Conservative wing of Republicans have argued that we need to immediately initiate sharp
reductions in government spending and entitlement programs and rapidly move towards a
balanced budget, (although they have never actually produced a budget proposal in which
tax revenues would match government spending plus entitlement transfers). Many
Democrats, while arguing that tax rate increases on high income earners need to be part of
the any deficit reduction program, have agreed that we need to initiate budget deficit
reduction now. However, under the current Pandemic Crisis with $2.2 Trillion stimulus
programs and about $500 billion additional subsidy to affected small business owners plus
existing Trump Tax policy implemented in 2018 was just the reverse of what democratic
party views on taxes. Citizens for Tax Justice (CTJ) have made an estimate of how much
these tax reform approved by the GOP led Congress would impact the existing budget
deficit crisis already. According to their estimate, this reform would yield tax revenues of
only $1.1 trillion. The Office of the Management and Budget (OMB) estimated that the
federal government would raise an estimated $2.5 trillion and spend $5 trillion in 2018 and
more in 2019. Another estimate by independent research organizations and government
agencies predict that the federal budget deficit might increase by $1 trillion in 2018-2019
budget year. Adding the burden of stimulus package $2.7 trillion already disbursed in
2020, would result which of the following outcomes?
A) What is the argument against attempting to balance the Federal Government
budget rapidly at the present time via either deep cuts in Federal Government
spending or sharp increases in federal income tax rates? 4pts
B) Does this argument imply that skyrocketing budget deficits don’t matter in the
long run? If not, why might the impact of large deficits predicted in the long run
under current tax and spending programs be different than the impact tod