econ

According to an article in the New York Times, an official at the Bank of Japan had the following explanation of why monetary policy was not pulling the country out of recession: "Despite recent major increases in the money supply, he said, the money stays in banks." Source: James Brooke, "Critics Say Koizumi's Economic Medicine Is a Weak Tea," New York Times, February 27, 2002.In the quote, when the official says "the money stays in banks," he is referring to (1) in the reserves in banks. But the real problem was that banks were not (2)The reason for this may have been a lack of (3) . the reserves.

1 an increase 2 lending 3 borrowers

When the Federal Open Market Committee (FOMC) decides to increase the money supply, it (1) U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it (2) U.S. Treasury securities.

1 buys 2 sells

When the Fed conducts an open market purchase, the Fed (1) and the money supply (2) . As a result of the open market purchase, the (3)

1 buys securities from banks 2increases 3money supply curve will shift to the right

William McChesney Martin, who was Federal Reserve chairman from 1951 to 1970, was once quoted as saying, "The role of the Federal Reserve is to remove the punchbowl just as the party gets going." When he said "to remove the punchbowl," he meant to engage in (1) policy.In terms of the economy, "just as the party gets going" refers to a situation in which real GDP (2) potential GDP, which will result in (3)

1 contractionary (2) is greater than 3 an increase in

the 4 monetary policy goals of the Federal Reserve ("the Fed")?

1 price stability 2 high employment 3 financial system stability 4 econ growth

The new equilibrium will be where 1 When the Fed conducts an open market purchase, the interest rate should 2

1 the new money supply curve intersects the original money demand curve. 2 decrease

When the Federal Reserve increases the discount rate as a part of a contractionary monetary policy, there is:

A decrease in the money supply and an increase in the interest rate.

Suppose the economy is initially in long-run equilibrium. The Fed enacts a policy to decrease the discount rate. In the short-run, this expansionary monetary policy will cause

A shift from AD1 to AD2 movement to point B, with a higher price level and higher output.

Suppose the economy is initially in long-run equilibrium. The Fed decides to increase the required reserve ratio. In the short-run, this contractionary monetary policy will cause:

A shift from AD2 to AD1 and a movement to point D, with a lower price level and lower output.

graph of the money market shown on the right, what could the money demand curve to shift from MD1 to MD2?

An increase in real GDP-- An increase in the price level

Who is able to borrow and lend at that Federal funds rate.?

Banks are able to borrow and lend from each other at that rate.

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.Screen

In 2017, one article in the Wall Street Journal had the headline: "Federal Reserve Expected to Deliver Rate Increase." Source: David Harrison, "Federal Reserve Expected to Deliver Rate," Wall Street Journal, June 14, 2017.What rate was the headline likely referring to?

Federal funds rate.

Why would a cut in the Selic rate be an appropriate policy action at a time when the inflation rate was falling and the economy was struggling?

Lowering the Selic rate would decrease other interest rates, which would increase aggregate demand and stimulate the economy.

In the graph of the money market shown on the right, what could cause the money supply curve to shift from MS1 to MS2?

The Fed decreases the money supply by deciding to sell U.S. Treasury securities.

Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?

The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP.

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.

Monetary policy is defined as:

The actions the Federal Reserve takes to manage the money supply and interest rates.

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.

The statement is false. A contractionary policy could result in a lower rate of inflation rather than a fall in the price level.

Why does the Fed's actions to increase or decrease the Federal funds rate above attract so much attention?

This rate ultimately has a substantial effect on many other interest rates.

In response to problems in financial markets and a slowing economy, the Federal Open Market Committee (FOMC) began lowering its target for the federal funds rate from 5.25 percent in September 2007. Over the next year, the FOMC cut its federal funds rate target in a series of steps. Writing in the New York Times, economist Steven Levitt observed, "The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December 2008." Source: Steven D. Levitt, "The Financial Meltdown Now and Then," New York Times, May 12, 2009. What is the relationship between the federal funds rate falling and the money supply increasing?

To decrease the federal funds rate, the Fed must increase the money supply.

How does lowering the target for the federal funds rate "pour money" into the banking system?

To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.

A student says the following: "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 the price level is rising.

The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called

expansionary monetary policy.

An article in the Wall Street Journal in 2017 discussed the decision by Brazil's central bank to cut the Selic rate, which is the equivalent in Brazil of the federal funds rate in the United States. According to the article, the cut occurred "as the country's inflation rate continues to fall quickly and the economy still struggles." Source: Jeffrey T. Lewis, "Brazil Cuts Its Benchmark Rate a Full Percentage Point," Wall Street Journal, April 12, 2017. In what sense do you think the Brazilian economy was "struggling" when this article was published?

he cut in the Selic rate suggests that Brazilian real GDP was below its potential

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.

low; high

Imagine a graph shows equilibrium in the money market. The equilibrium interest rate is determined at point E where the downward-sloping money demand and vertical money supply curves intersect. Suppose the Fed wants to lower the equilibrium interest rate. To lower the equilibrium interest rate, the Fed will take actions that will

shift the money supply curve to the right.

Imagine a graph shows equilibrium in the money market. The equilibrium interest rate is determined at point E where the downward-sloping money demand and vertical money supply curves intersect. Suppose the Fed wants to lower the equilibrium interest rate.The new equilibrium will be

where the new money supply curve intersects the original money demand curve.