Economics Exam #3 Homework Review

quantitative easing

In response to already low interest rates doing little to stimulate the economy, the Fed began buying 10 year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as ____ ____.

natural

In the long run, unemployment is at its ____ rate.

quantity theory of money

M x V = P x Y

operation twist

In response to already low interest rates doing little to stimulate the economy, the Fed announced a new program in September 2011 under which it would purchase long-term Treasury securities. This policy is known as ____ ___.

declined

Support for a monetary rule of the kind advocated by Friedman ____ since 1980 because the Fed's performances since 1980 has been excellent even without a formal inflation target.

180 million

Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank. If the reserve requirement ratio is 0.1 the maximum change in money supply is $_____.

-5 million

Suppose Warren Buffet withdraws $1 million from his checking account at Chase Manhattan Bank. If the reserve requirement ratio is .2 the maximum change in deposits in the banking system is $_______.

the same as LRAS

Suppose that workers and firms could always predict next year's price level with perfect accuracy. Under these circumstances, the SRAS curve would be ___ ___ __ the ____.

1800

Suppose that you deposit $2000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can make as a direct result of your deposit is ____.

less than

Suppose the reserve requirement ratio is .20. If banks are conservative and choose not to loan all of their excess reserves, the real world deposit multiplier is ___ ___ 5.

failure commercial

The Fed helped JP Morgan Chase buy Bear Stearns because the ___ of Bear Stearns would lead to a larger investment bank failure and because _____ banks would be reluctant to lend to investment banks.

dual mandate

The Fed is said to have a ___ ____ 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.

interest rate money supply

The Fed uses policy targets of ____ ___ and/ or ____ ____ because it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.

open market operations

The Fed would use ____ ____ ____ to buy Treasury bills to pursue an expansionary monetary policy.

low low increase

The Fed's objective in using "quantitative easing" and "Operation Twist" are to keep interest rates on 10 year Treasury notes ___, to keep interest rates on mortgages __, and to ____ aggregate demand.

7 4

The Federal Reserve Bank's Board of Governors consists of __ members appointed by the president of the US to 14 year, non-renewable terms. One of the board members is appointed to a __ year, renewable term as the chairman.

right technological

The SRAS curve will shift to the ___ if there is a ______ change.

left increase

The SRAS curve will shift to the ___ if there is an ___ in the expected price of an important natural resource.

left increase

The SRAS curve will shift to the ___ if there is an ____ in expected future prices.

right increase

The SRAS curve will shift to the ___ if there is an ____ in productivity.

left increase

The SRAS curve will shift to the ___ if there is an ____ in the adjustment of workers' and firms' prior underestimation of the price level.

right increase

The SRAS curve will shift to the ___ if there is an ____ in the labor force or capital accumulation.

penny

The US ____ causes problems such as its seignorage is negative, inflation has degraded its worth to where it essentially is useless, and its face value is less than the cost of producing it.

fiat

The US dollar can best be described as ___ money.

price level movement along

The US economy experiences 4 percent inflation. Because this is a change in the ___ ___, it will cause a ____ ___ the aggregate demand curve.

12

The US is divided into __ Federal Reserve Districts.

Fed

The __ acts as a lender of last resort, making loans to banks so that they can pay off depositors.

M1

The __ measure of the money supply equals currency plus checking account balances plus traveler's checks.

short term nominal interest rate

The ___ ____ ____ ____ ___ is considered the most relevant interest rate when conducting monetary policy.

quantity equation

The ___ ____ shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.

financial firms

The ____ ___ of the shadow banking system were more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.

federal funds rate

The ____ ____ ___ is very important for the Fed's monetary policy because the Fed uses it as a monetary policy target since they can control the rate through open market operations.

Federal Reserve

The _____ ____ acting as the lender of last resort to prevent a bank panic constitutes offering discount loans to distressed banks, but the "bail out of the banks" involved providing funds to the banks in exchange for ownership in those banks.

downward

The aggregate demand curve slopes _____ because decreases in the price level raise real wealth and increase consumption spending.

real GDP price level

The basic aggregate demand and aggregate supply curve model helps explain short term fluctuations in ___ ____ and the ____ ___.

financial markets

When the Fed increased the volume of discount loans after the terrorist attacks of September 11, 2001, it was trying to achieve stability of ____ ____.

buys sells

When the Federal Open Market Committee decides to increase the money supply, it ___ US Treasury securities. If the FOMC wishes to decrease the money supply, it ___ US Treasury securities.

unlikely fall

When the economy enters a recession, your employer is ____ to reduce your wages because output and input prices generally ___ during recession.

open market operations

the tool most important to the Fed for conducting monetary policy

worthless

"People lined up on the veranda of the American mission hospital here from miles around to barter for doctor visits and medicines, clutching scrawny chickens, squirming goats, and buckets of maize" The people buying medical services at this hospital could not use money to pay for the medical services they were buying because Zimbabwean currency was _____.

double coincidence of wants

A baseball fan with a Mike Trout baseball card wants to trade it for a Miguel Cabrera baseball card, but everyone the fan knows who has a Cabrera card doesn't want a Trout card. Economists characterize this problem as a failure of the principle of a _____ _____ __ ___.

money

A disadvantage of holding ___ is that it, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.

aggregate demand

A reduction in consumer confidence that causes _____ ____ to fall could cause a decrease in real GDP and, if large enough, a recession.

fall

A reduction in the growth rate in foreign countries compared to the US that causes aggregate demand to ___ could lead to a reduction in real GDP and may even cause a recession.

faster

According to the quantity theory of money, inflation results from when the money supply grows ____ than real GDP.

rightward

Almora, a developing open economy, is experiencing an economic boom since it discovered oil reserves off its coast two years ago. Bill Hudson, an economist with the Finance Ministry of Almora, said in an interview that the oil boom improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with Hudson's view. In one of his recent articles in the country's leading business daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. Bill and Robin would most likely agree with the statement that the discovery of oil reserves has resulted in a _____ shift of the long-run aggregate supply curve.

increase net exports

An ____ in ___ ____ will shift the aggregate demand curve to the right, ceteris paribus.

increase

An ____ in the price level will move the economy up along a stationary short run aggregate supply curve.

increase

An _____ in oil prices that decreases short-run aggregate supply would lead to an increase in the price level (a short-run inflation).

money

An advantage of holding ____ is that it can be used to buy goods, services, or financial assets

commodity

An asset would be an unusable medium of exchange for all reasons except if the asset should be a _____ that has intrinsic value.

aggregate demand

An increase in government purchases that increases _____ _____ would cause an increase in the price level.

decreases

An increase in interest rates ____ investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.

left reducing lowering

An increase in interest rates affects aggregate demand by shifting the aggregate demand curve to the ___, ____ real GDP and _____ the price level.

increase decrease

An increase in the interest rate should ____ the demand for dollars and the value of the dollar, and net exports should ____.

decrease decreases

As the interest rate increases, consumption, investment, and net exports ____; aggregate demand _____.

banks banks

At the "target interest rate" which is the federal funds rate ____ borrow and ____ lend.

actual required

Banks can continue to make loans until their ___ reserves equal their ____ reserves.

less

Banks can make additional loans when required reserves are __ than total reserves.

loans

Beginning in 2008, the Federal Reserve and the US Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways such as making ___ to primary dealers and holders of mortgage-backed securities.

1930 Great Depression

Congress broadened the Fed's responsibility since the ___s as a result of the ____ _____.

bank panics

Congress passed legislation to create the Federal Reserve System in 1931 in order to end the instability created by ___ ___ by acting as a lender of last resort.

decrease increase decrease

Contractionary monetary policy on the part of the Fed results in a ____ in money supply, an _____ in interest rates, and a ____ in GDP.

potential actual

Even though real GDP in 1970 was slightly greater than real GDP in 1969, the unemployment rate increased substantially from 1969 to 1970 which can be explained because _____ GDP increased but ____ GDP did not, thus there is unemployment.

increasing decreasing

Expansionary monetary policy refers to the Federal Reserve's ____ the money supply and ____ interest rates.

higher higher

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ____ and real GDP to be relatively ____.

investment right

Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in _____, it will cause a shift to the ___ in the aggregate demand curve.

decrease

From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, the Federal Reserve would most likely ____ interest rates.

potential GDP

Full-employment GDP is also known as ____ ___.

decrease

Higher personal income taxes ____ aggregate demand.

shift right

Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once the refining capacity was restored, these prices came back down. The restoration of refining capacity should ___ the short-run aggregate supply curve to the ___.

increase not change

If a person withdraws $500 from his/her savings account and puts it in his/her checking account, then M1 will ____ and M2 will ______.

not change not change

If credit card balances rise in the economy, then M1 will _____ and M2 will _____.

decrease

If households and firms decide to hold less of their money in checking account deposits and more in currency, then the money supply will _____.

four

If something is to be considered as money, it has to fulfill all ____ functions.

AD right

If the Fed believes the economy is about to fall into recession, it should use an expansionary monetary policy to lower the interest rate and shift __ to the ___.

AD left

If the Fed believes the inflation rate is about to increase, it should use a contradictory monetary policy to increase interest rate and shift __ to the ___.

increase

If the Federal Reserve purchases $140 million worth of US Treasury bills from the public, the money supply will ____.

procyclical

If the Federal Reserve raises or lowers interest rates too late, it could result in a ____ policy that destabilizes the economy.

shift right

If the US dollar decreases in value relative to other currencies, this will ___ the aggregate demand curve to the ___.

rise

If the current penny was made worth 5 cents rather than its current value of 1 cent, M1 would ___.

decline

If the economy is at full employment and firms become more optimistic about the future profitability of new investment, unemployment will _____ in the short run.

negative increase

If the inflation rate for 1970 is greater than the inflation rate for 1969, it is likely that the recession was caused by a ____ supply shock rather than an _____ in aggregate demand.

2

If the money supply is growing at a rate of 4 percent per year, real GDP is growing at a rate of 2 percent per year, and velocity is constant, the inflation rate will be __ percent.

5

If the money supply is growing at a rate of 4 percent per year, real GDP is growing at a rate of 2 percent per year, and velocity is growing at 3 percent per year instead of remaining constant, inflation rate will be __ percent.

low lowers

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.

5

If the reserve requirement ratio is 0.20, the simple deposit multiplier is __.

10000

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A's reserves immediately increase by $_____.

8000

Imagine that Kristy deposits $10000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A can make a maximum loan of $____.

8000

Imagine that Kristy deposits $10000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A's excess reserves increase by $____.

50000

Imagine that Kristy deposits $10000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, checking account despots in the banking system as a whole could eventually increase up to a maximum of $_____.

short

In 1969, actual real GDP was greater than potential real GDP because the economy can produce a level of GDP above potential GDP in the ___ run.

one bank many banks

In a fractional reserve banking system, the difference between a "bank run" and a "bank panic" is that a bank run involves ___ ___; a bank panic involves ___ ___.

households firms banks

In addition to the Federal Reserve Bank, _____, ___, and ___ are other economic actors that influence the money supply.

left

Increases in the interest rate will make the aggregate demand curve shift to the ___.

deposits households

Investment banks differ from commercial banks because they do not take ___ and they generally do not lend to _____.

P M V

Irving Fisher's quantity equation M x V = P x Y - __ = the GDP deflator - __ = M1 definition of money supply - __ = average number of times a dollar is spent on goods and services

procyclical

Monetary policy could be ____ if the Federal Reserve is late recognizing that a recession has begun and conducts expansionary monetary policy.

living standards unemployment financial markets

Monetary policy goals of the Federal Reserve Bank include higher ___ ____, low _____, and stable _____ _____.

inflation

Money is an imperfect standard of deferred payment because ____ causes the value of money to decrease over time.

medium of exchange

Money's most narrow definition is based on its function as a ___ __ ____.

250000

Most depositors seem to be unworried that banks loan out most f the deposits they receive because the FDIC insures deposits up to $_____.

interest rate

Most economists believe that the best monetary policy target is an ___ ___.

medium of exchange store of value unit of account

Name 3 of the 4functions of money: - _____ of _____ - ____ of ____ - ___ of _____

discount policy open market operations reserve requirements

Name 3 policy tools the Fed uses to control the money supply: - ___ ____ - ___ ____ ____ - _____ ______

inflation

One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal, the rate of ____ should be low, such as 1% to 3%, and should be fairly consistent.

increase

Professor Spencer's statement "This printing money will keep the deflation wolf from the door" means that an increase in the money supply that exceeds the rate of growth of GDP will _____ the price level.

reduction

The economy suffered a mild recession in 2001. Despite the recession, home sales and durable goods sales remained high because the Fed caused a ____ in the federal funds rate to its lowest level in 40 years.

consumption left

The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in ____, it will cause a shift to the ___ in the aggregate demand curve.

currency

The largest portion of M1 is made up of ____.

vertical

The long-run aggregate supply curve is ____ because in the long run, changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.

vertical

The long-run aggregate supply curve is ____ because in the long run, changes in the price level of not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.

money supply interest

The main monetary policy targets are the ___ ___ and ___ ___.

reserves loans securities

The major assets on a bank's balance sheet are its ___, ___, and holdings of ____.

stability employment price

The monetary policy goals of the Fed include: - maintain ____ of financial markets and institutions - maintain high ______ - maintain ___ stability

money supply

The most important role of the Federal Reserve in today's US economy is controlling the ___ ___ to pursue economic objectives.

long-run aggregate supply

The position of the _____ ____ ____ curve is determined by the number of workers, the amount of capital, and the available technology.

inflation long

The quantity theory of money is better able to explain the ____ rate in the __ run.

left

The recession of 2007-2009 made many consumers pessimistic about their future incomes which causes the aggregate demand curve to curve to the ___.

multiplied

The required reserves of a bank equal its deposits _____ by the required reserve ratio.

liquidity trap

The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as a ____ ___.

destabilizes

The supporters of a monetary growth rule believe that active monetary policy _____ the economy, increasing the number of recessions and their severity.

money

The use of ___ reduces the transaction costs of exchange, eliminates the double coincidence of wants, and allows for greater specialization.

decrease

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

increase

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

discount loans

When Congress established the Federal Reserve in 1913, its main responsibility was to make ____ ___ to banks suffering from large withdrawals by depositors.

store of value

When money is acting as a ___ __ ___, it allows an individual to transfer dollars, and therefore purchasing power, into the future.

medium of exchange

When sellers are willing to accept money in exchange for goods and services, money is acting as a ____ __ ____.

increases

When the Fed conducts an open market purchase, the Fed buys securities from banks and the money supply ____.

decrease

When the Fed conducts an open market purchase, the interest rate should _____.

not change

With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would _____.

rise

With high inflation and little purchasing power, output is likely to fall, and unemployment will ___.

shift left

Workers expect inflation to rise from 3% to 5% next year. As a result this should ___ the short run aggregate supply curve to the ___.

low expansion

__ levels of unemployment during an _____ make it easier for workers to negotiate higher wages.

Fannie Mae Freddie Mac

___ __ and ___ __ are two institutions that Congress created in order to increase the availability of mortgages in a secondary market.

credit card

___ ____ balances are not counted in M1.

bank reserves

___ ____ include vault cash and deposits with the Federal Reserve.

fiat commodity

___ money has no value except as money, whereas _____ money has value independent of its use as money.

monetary policy

____ ____ tools used by the Federal Reserve banks include increasing the reserve requirement from 10 percent to 12.5 percent, decreasing the rate at which banks can borrow money from the Federal Reserve, and buying $500 million worth of government securities, such as Treasury bills.

Milton Friedman

____ _____ would have liked the Fed to follow a monetary rule where the money supply is increased every year by a percentage rate equal to the long-run growth rate of real GDP.

deflation

____ can cause "shoppers to hold back" because consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.

deflation

____ will increase the quantity of real GDP demanded.

aggregate demand

______ ____is comprised of expenditure components that include government spending, consumption, investment and net exports.

price deflation

a fall in the price level

monetary rule

a plan for increasing the money supply at a constant rate regardless of the prevailing economic condition

banking panic

a situation in which many banks experience runs at the same time

quantitative easing

buying longer term Treasury securities that are not usually involved in open market operations

shadow banking system

financial firms that raise money from investors and provide it to borrowers

operation twist

the Fed's program to purchase $400 billion in long-term Treasury securities while selling an equal amount of shorter-term Treasury securities

M1

the Federal Reserve's narrowest definition of the money supply

demand for money

the amount of money- currency and checking account deposits- that individuals hold

federal funds rate

the interest rate that banks charge each other for overnight loans

M1

the most liquid measure of money supply

automatic mechanism

the process of an economy adjusting form a recession back to potential GDP in the long run without any government intervention

discount rate

the rate at which the Fed lends to banks

federal funds rate

the rate that banks charge each other for short-term loans of excess reserves