ECON Midterm 2
If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP.
$250 bil.
imagine that K. deposits $10,000 into her checking acc. deposit at bank A and that the requrired reserve ratio is 20% as a result of K's deposit, bank A can make a max loan of
$8,000
according to the quantity theory of money, if the money supply grows at 20 percent and the real gdp grows at 5%, then the inflation rate will be
15%
suppose bill gates deposits 20 mil. into his checking account at wells fargo bank. If the reserve requriement ratio is 0.1 what is the maximum change in the money supply
180 mil
if the required reserve ratio is 5 percent, then the simple deposit multiplier is
20
Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals
8%
Suppose that the equilibrium real federal funds rate is 2 percent and the target rate of inflation is 1 percent. Use the following information and the Taylor rule to calculate the federal funds rate target: Current inflation rate = 6 percent Potential real GDP = $14.99 trillion Real GDP = $14.69 trillion The federal funds rate is __________
9.5%
open market operations refer to the purchase or sale of____________ to control the money supply
US Treasury securities by the Federal Reserve
Which of the following would cause the money demand curve to shift to the left?
a decrease in real gdp
hyperinflation is caused by
a high rate of growth in the money supply
An increase in the interest rate causes
a movement up along the money demand curve
"I understand why the Fed uses expansionary policy but I don't understand why it would ever use contractionary policy. Why would the government ever want the economy to contract?" The government would want the economy to contract when real GDP is
above potential gdp and price level is rising
a central bank like the federal reserve in the U.S. can help banks survive a bank run by
acting as a lender of last resort
Fiscal policy actions that are intended to have long−run effects on real GDP attempt to increase ________ through changing ________.
aggregate supply; taxes
The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of
automatic stablizers
Which of the following statements about the Social Security, Medicare, and Medicaid programs is true?
costs are being driven up by the fact that americans are living longer and medical costs are rising substatially
the M1 measure of the money supply =
currency + checking account balances + travelers checks
Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the federal funds target rate equals the
current inflation rate + the real equilibrium federal funds rate
When housing prices fall, as they did beginning in 2006 following the housing market bubble, consumption spending on furniture, appliances, and home improvements ________ as many households found it ________ to borrow against the value of their homes.
declined; harder
The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the
decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods.
In the countries that have adopted inflation targeting, the inflation rate has typically
decreased
An increase in interest rates
decreases investment spending on machinery, equiptment , and factories, consumptions spending on durable goods and net exports
a bank is legally required to hold a fraction of its ______ as ______.
deposits; required reserves
The supporters of a monetary growth rule believe that active monetary policy
destablizes the economy, increaseing the number of recessions and their severity
The Federal Reserve cut the federal funds rate seven times between September 2007 and March 2008. What event led the Fed to make these reductions in the federal funds rate?
during this period there was a substantial reduction in the demand for housing
Why did the Fed help JP Morgan Chase buy Bear Stearns?
failure of bear stearns would lead to a larger investment bank failure commercial banks would be reluctant to lend to investment banks
Explain whether you agree with this argument: If the Fed actually ever carried out a contractionary monetary policy, the price level would fall. Because the price level has not fallen in the United States over an entire year since the 1930s, we can conclude that the Fed has not carried out a contractionary policy since the 1930s
false. a contractrionary policy could result in a lower interest rate of inflation rather than a fall in the price level.
To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, ________, to sell bonds to investors and use the funds to purchase mortgages from banks.
fannie mae and freddie mac
For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the
federal funds rate
The interest rate that banks charge other banks for overnight loans is the
federal funds rate
The Taylor rule links the Federal Reserve's target for the
federal funds rate to economic variables
Monetary policy refers to the actions the
federal reserve takes to manage the money supply and interest rates to pursue its economic objectives
Expansionary monetary policy refers to the ________ to increase real GDP.
federal reserve's increasing the money supply and decreasing interest rates
the federal open market committee consusts of 7 members of the _____, the president of the federal reserve bank of new york, and _______.
federal reserves board of governors: four presidents from the other 11 federal reserve banks
Fiscal policy refers to changes in
federal taxes and purchases that are intended to achieve macroeconomic policy objectives
When housing prices ________ as they did beginning in 2006 following the housing market bubble, most banks and other lenders tightened the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages.
fell; harder
The Fed uses a "core" price index, one that excludes food and energy prices to measure inflation. It does so because
food and energy prices have wide swings and are not related to the causes of general inflation
If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in
govt. purchases
What are the gains to be had from simplifying the tax code?
greater clarity of the decisions made by households and firms increased efficiency of households and firms resources from the tax preparation industy freed up for other endevors
rapid increases in the price level, which is known as
hyperinflation
Which of the following is a reason why we should consider the federal national debt a problem?
if the debt drives up inteest rates, crowding out will occure
there is a strong link between changes in the money supply and inflation
in the long run, but not in the short run
Using the money demand and money supply model, an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to
increase
the purchase of 1 million of treasury Securities by the Federal Reserve, if there is no change in the quantity of currency, will cause Reserves at Banks to
increase by 1 million
Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant
increase in inflation
Which of the following statements about inflation targeting is true?
inflation targeting would make it easier for households and firms to form accurate expectations of future inflation, improving their planning and the effciency of the economy
The Federal Reserve cannot affect real GDP directly; therefore, the Fed typically uses the following as its policy target
interest rates
Which of the following would be most likely to induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in
investment spending
The tax increases necessary to fund future Social Security and Medicare benefit payments would be
large, and could discourage work effort, entreprenuership, and investment, thereby slowing economic growth
The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as
liquidity trap
If the probability of losing your job remains _________, a recession would be a good time to purchase a home because the Fed usually _________ interest rates during this time.
low; lowers
Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often
lowers interest rates during recessions
Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism in which the Fed can affect the economy through monetary policy? Increasing the money supply
lowers the interest rate, and firms increase investment spending
the fed is said to have a "dual mandate" because
maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the employment act of 1946
Beginning in 2008, the Federal Reserve and the U.S. Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways. Which of the following is one of the unprecedented actions of the Fed?
making loans to primary dealers and holders of mortgage-backed securities
which of the following is a fuction that money serves
medium of exchange, unit of account, and store of value
With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would
not change
if credit card balances rise in the economy, then M1 will _________ and M2 will ____________
not change; not change
the three main monetary policy tools used by the Federal Reserve to manage the money supply are
open market operations, discount policy, and reserve requirements
Expansionary fiscal policy has a ________ multiplier effect on equilibrium real GDP, and contractionary fiscal policy has a ________ multiplier effect on equilibrium real GDP.
positive; negative
When the Federal Reserve was established in 1913, its main policy goal was
preventing bank panics
The top policy goal for Paul Volker when he became chair of the Federal Reserve's Board of Governors in 1979 was
price stability
The Federal Reserve's four goals of monetary policy are
price stability, high employment, economic growth, and stability of financial markets and institutions
Crowding out refers to a decline in ________ as a result of an increase in ________.
private expenditures; government purhcases
in 2008, the fed and the treasury began attempting to stabilize the commercial banking system through TARP by
providing funds to banks in exchange for stock
With the federal funds rate near zero and the economy still struggling, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as
quantitative easin
Under the monetary growth rule proposed by the monetarists, the money supply would grow each year at a constant rate equal to the long−run rate of growth of
real GDP
if the central bank can act as a lender of last resort during a banking panic, banks can
satisfy customer withdrawal needs and eventually restore the publics faith in the baning system
the process of bundling loans together and buying and selling these bundles in a secondary finacial market is called
securitization
in 2008, timothy geithner referred to investment banks, money market mutual funds, hedge funds, and other finacial firms engaged in similar activities as the
shadow banking systyem
The money market model is concerned with ________ and the loanable funds market model is concerned with ________.
short-term nominal interest rates; long-term interest rates
the ___________ the reserve ratio, the ______________ the money multiplier
smaller; larger
A former Federal Reserve official argued that at the Fed, "the objectives of price stability and low long-term interest rates are essentially the same objective." This is true because...
stable prices make it easier to plan for the future, so expectations can be stable, which makes it less costly to make loans
The Federal Reserve can affect directly its monetary policy ________, which then affect its monetary policy ________.
targets; goals
Which of the following best describes supply−side economics?
tax rates, particularly marginal tax rates, affect the incentive to work, save, invest, and therefore aggregate supply
In early 2008, the housing crisis and rising oil prices increased the risk of recession in the United States. What fiscal policy action was taken by Congress and the president to counter these events?
taxpayers were given rebates on taxes they already paid
the Federal Open Market Committee consists of
the Board of Governors + 5 of the Federal Reserve Bank presidents
which of the following are responsible for managing money supply in the United States
the Federal Open Market
Which of the following events was an important cause of the 2007-2009 recession?
the collapse of a housing bubble
The Fed's preferred measure of inflation is
the core personal consumption expenditures index
in response to the desrtuctive bank panics of the great depression, furture bank panics are designed to be prevented by
the establishment of the federal deposit insureance corporation
Which of the following is a monetary policy response to the economic recession of 2007-2009 and the accompanying financial crisis.
the fed expanded the eligibility for discount loans to firms other than commercial banks the fed provided loans directly to corporations by purchasing commercial paper the fed purchases large amounts of mortgage-backed securites
If the Fed raises its target for the federal fund rate, this indicates that
the fed is pursuing a contridictory monetary policy
The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is not one of the ways the Fed responded?
the fed lowered the required reserve ratio on the demand deposit accounts in order to increase the amount of bank reserves
The hypothetical information in the table shows what the values for real GDP and the price level will be in 2017 if the Fed does not use monetary policy.Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2017?
the fed should lower the target for the federal funds rate
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
For the federal deficit to be lowered,
the federal govt. expenditures must be lower than its tax revenue
Suppose that the economy is producing below potential GDP and the Fed implements the correct change in monetary policy, but not until after the economy has passed the trough of the recession. Then
the feds exansionary policy will result in too large increase in real GDP
the quanitiy theory of money implies that the price level will be stable when the growth rate of the money supply equals
the growth rate in real gdp
the discount rate is
the interest the fed charges banks for loans from the fed
The use of fiscal policy to stabilize the economy is limited because
the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely ways
Which of the following is not a viable monetary policy target for the Fed?
the money demand
Monetarists think that the Fed should use _________ as a target when conducting monetary policy.
the money supply
The Federal Reserve's two main monetary policy targets are
the money supply and interest rates
the seven members of the Board of Governors of the Federal Reserve are appointed by
the president
the major shortcoming of a barter economy is
the requirement of a double conincidence of wants
The federal government debt equals
the total value of U.S. treasury bonds outstanding
What is meant by supply-side economics?
the use of taxes to increase incentive to work, save, invest, and start a business in order to increase long-run aggregate supply
the quantity theory of money was derived from the quantity euation by asserting that
the velocity of money was fixed
If the Fed's policy is contractionary, it will
use open market operations to sell treasury bills
as was demonstrated in 2007, firms in the shadow bankinf system
were very vulnerable to bank runs
When is it considered "good policy" for the government to run a budget deficit?
when borrowing is used for long-- lived capital goods
Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase?
yes, because fiscal policy and monetary policy are sperate things
A political commentator argues: "Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are unpopular." Briefly explain whether you agree.
agree because expansionary fiscal policies create employment and increase GDP whereas contridictory fiscal policies impose an artifical recession in the economy
the use of money
allows for greater specilization, eliminates the double conincidence of wants, and reduces the trasaction cost of exchange
The decline in housing prices that began in 2006 led to rising defaults among which borrowers?
alt-A and subprime borrowers borrowers who had made only small down payments borrowers with adjustable-rate mortgages
money is
an asset that people are willing to accpet in exchange for good and services
moving along, upwards, the MD model is
an increase in the interest rate
Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called
automatic stablizers
to increase the money supply, the federal reserve could
conduct an open market purchase of treasury securities
Fiscal policy is determined by
congress and the pres.
Which of the following is considered contractionary fiscal policy?
congress increase the income tax rate
In preparing their estimates of the stimulus package's effect on GDP, Obama administration economists estimated a government purchases multiplier of 1.57. This indicates that a $1 billion increase in government purchases would increase equilibrium real GDP by
$1.57 bil.
imagine that Christy deposits $10,000 of currency in her checking account deposit at bank a and that the required Reserve ratio is 20% refer to the scenario above. as a result of Christie's Deposit Bank as reserves immediately
$10,000
The leader of the monetarist school and major proponent of a monetary growth rule was
Milton Friedman
When the Fed increased the volume of discount loans after the terrorist attacks of September 11, 2001, it was trying to achieve
Stability of the finicial markets
In October 2008, Congress passed the ________, under which the Treasury provided funds to banks in exchange for stock.
TARP
the real power within the federal reserve lies with the
board of governors
Which of the following is an appropriate policy for the fed to pursue if it wants to increase the money supply
buy us tresury bills
The aggregate demand curve will shift to the right ________ the initial increase in government purchases.
by more than
If the government increases expenditure without raising taxes, this will
cause the interest rate to increase, thereby, reducing private investment and crowding out the private sector increase the bidget deficit and require the govt to borrow additional funds
the larges prportion of the M1 is made up of
checking acc. deposits
Consider a tax cut which affects not only consumer disposable income, but also after−tax earnings from labor supplied to labor markets and from financial assets acquired through saving. In the long run we would expect this tax cut to
increase the level of real GDP
Suppose the government wants to maintain a balanced budget. To achieve this goal, when the economy falls into recession government would need to ________ taxes, which would cause aggregate demand to ________.
increase; decrease
A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments _________.
increase; fall; rise
a decrease i interest rates can _______ the demand for stocks as stocks become reletively ________ attractive investments as compared to bonds
increase; more
With an expansionary monetary policy, investment, consumption, and net exports all ________, which results in the aggregate demand curve shifting to the ________, increasing real GDP and the price level.
increase; right
The largest source of federal government revenue in 2014 was
individual income taxes
Inflation targeting refers to conducting ________ policy so as to commit the central bank to achieving a ________.
monetary; publicly announced level of inflation
The Federal Reserve cannot target both the money supply and the interest rate because it does not control
money demand
An increase in the price level causes
money demand curve shift to the right
which of the following is one of the most important benifits of money in an economy
money makes exchange easier, leading to more specilization and higher productivity
the quantity theory of money predicts that, in the long run, inflation results from the
money supply growing at a faster rate than the real gdp
according to the quanitiy theory of money, deflation will occur if the
money supply grows at a slower rate than the real gdp
An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by
more than $200 bil.
It is ________ difficult to effectively time fiscal policy than monetary policy because ________.
more; fiscal policy takes longer to implement
The money demand curve has a
negative slope because an increase in the interest rate decrease the quanitiy of money demanded