Econ Test 4 Chapters 15 & 16

What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?

"Fannie Mae" and "Freddie Mac"

What is inflation targeting?

Committing the central bank to achieve an announced level of inflation

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?

Consumption of durable goods, business investment projects, the value of the dollar

The multiplier effect is only a consideration for increases in government purchases

False

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

What is the difference between federal government purchases (spending) and federal government expenditures?

Government purchases are included in government expenditures

Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?

Low prices

What are the gains to be had from simplifying the tax code?

Resources from the tax preparation industry freed up for other endeavors, greater clarity of the decisions made by households and firms, increased efficiency of households and firms

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).

The Fed can only soften the magnitude of recessions, not eliminate them

What are the Fed's main monetary policy targets?

The money supply and interest rates

When is it considered "good policy" for the government to run a budget deficit?

When borrowing is used for long-lived capital goods

Does government spending ever reduce private spending

Yes, due to crowding out

Which of the following will lead to a decrease in the equilibrium interest rate in the economy

a decrease in GDP

The simple multiplier effect shows the resulting change in real GDP due to an increase in the government purchases or a decrease in taxes assuming that the price level is __________. In reality, the SRAS is ___________. As a result, when AD shifts to the right, in reality the change in real GDP will be _________ it would be if the price level were constant

constant; upward sloping; less than

The opportunity cost of holding money ________ when moving down along the money demand curve

decreases

The interest rate that banks charge other banks for overnight loans is the

federal funds rate

The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of _________, it can also achieve the goal of _________ simultaneously.

high employment; economic growth

Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to

increase

Using the money demand and money supply model, and open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

increase

An increase in the interest rate

increases the opportunity cost of holding money

The money demand curve has a

negative slope because an increase in the interest rate decreases the quantity of money demanded

The Federal Reserve's four goals of monetary policy are

price stability, high employment, economic growth, and stability of financial markets and institutions

The money demand curve would move from left to right if

real GDP increased

To reassure investors who were unwilling to buy mortgages in the secondary market, the US congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac

sell bonds to investors and use the funds to purchase mortgages from banks

The Fed can increase the federal funds rate by

selling Treasury bills, which decrease bank reserves

The higher the tax rate, the ________ the multiplier effect

smaller

The monetary policy target the Federal Reserve focuses primarily on today is

the interest rate

The Federal Reserve's two main monetary policy targets are

the money supply and interest rates

Which of the following describes what the Fed would do to pursue and expansionary monetary policy?

use open market operations to buy Treasury bills