Chapter 17 HW
The federal funds target rate equals _____%
6%
Why did the Fed help JP Morgan Chase buy Bear Stearns?
Commercial banks would be reluctant to lend to investment banks ; Failure of Bear Stearns would lead to a larger investment bank failure.
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation
Consider the figures below and determine which is the best description of what causes the shift from AD1 to AD2.
Example A shows a contractionary monetary policy. The price level and real GDP both fall. Example B shows an expansionary monetary policy. The price level and real GDP both rise.
We would expect the Fed to pursue what type of policy in order to move AD2 to AD2, policy and reach equilibrium (point C) in the second period?
Expansionary monetary policy
In the figure to the right, when the money supply increased from MS1 to MS2, the equilibrium interest rate fell from 4% to 3%. Why?
Increased demand for Treasury securities drives down their interest rate. Initially, firms hold more money than they want relative to other financial assets. Increased demand for Treasury securities drives up their prices.
How do investment banks differ from commercial banks?
Investment banks generally do not lend to households ; Investment banks do not take deposits
Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?
Low prices
Consider the figure. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?
No. The Fed cannot target both the money supply and the interest rate simultaneously.
Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD2 to AD2, policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)
Open market purchase of government securities
Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD2 to AD2, policy and reach equilibrium (point C) in the second period?
Open market purchase of government securities.
If the Federal Reserve is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the recession, the poor timing caused another problem: inflation. This is an example of what type of policy?
Procyclical policy
The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions?
The Fed can only soften the magnitude of recessions, not eliminate them
Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?
The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule.
What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium?
The Fed will pursue an expansionary monetary policy
Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand?
The value of the dollar, Consumption of durable goods, Business investment projects
If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06, we would expect the Federal Reserve Bank to pursue ____________ monetary policy.
a contractionary
When the Federal Open Market Committee (FOMC) decides to increase the money supply, it _______ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it ______ U.S. Treasury securities.
buys ; sells
In the figure, the opportunity cost of holding money ________ when moving from Point A to Point B on the money demand curve.
decreases
If the Fed's policy is successful, what is the effect of the policy on the following macroeconomic indicators? Actual real GDP __________ Potential real GDP __________________. Price level ____________. Unemployment ____________.
decreases ; does not change ; decreases ; increases
In the figure, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD1 to MD2 (Point A to Point C)?
increase in real GDP or increase in the price level
If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators? Actual real GDP: _________ Potential real GDP: ___________ Price level: ___________ Unemployment: __________
increases ; does not change ; increases ; decreases
If the Fed's policy is successful, what is the effect on the following indicators? Actual real GDP: ___________ Potential real GDP: _______________ Price level: __________ Unemployment: _________
increases ; does not change ; increases ; decreases
the federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves
The ________ is considered the most relevant interest rate when conducting monetary policy
short-term nominal interest rate
As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?
the federal funds rate
What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?
"Fannie Mae" and "Freddie Mac"