economics module 4

Why did added productivity growth in the 1990's cause a change in monetary policy?

Added productivity growth held down inflation, so the Fed could keep interest rates low throughout most of the decade.

In the mid1990's Alan Greenspan thought productivity growth had increased potential output. Lawrence Meyer thought that potential output had not increased. This meant that

Greenspan thought interest rates could remain low without the threat of inflation, while Meyer thought interest rates had to be raised to prevent inflation.

Under what conditions could double-digit inflation be a threat in the coming decade?

If the Federal Reserve fails to decrease the monetary base when the money multiplier and velocity return to normal levels.

Which of the following was a counter-cyclical monetary policy response to the Great Recession?

Quantitative easing.

Why did China lend so much money for U.S. home mortgages in the 2000's?

To encourage their exports, China bought dollars to keep the value of the yuan low. They invested some of these dollars in the secondary mortgage market.

Suppose the quantity of money (QM) is the monetary base (MB) times the money multiplier (mm), and the equation of exchange is QM x V = P x Q. The Federal Reserve has greatly increased the monetary base in the past five years. This could create very high inflation if

V and mm rise to pre-recession levels

How does the effect of a Federal budget deficit during an expansion depend on monetary policy?

With low interest rates, a deficit creates inflation. With high interest rates, a deficit crowds out investment and exports.

The supply shock caused by the sudden rise in oil prices in 1973 resulted in

a recession and higher inflation.

The United States faces a difficult fiscal policy problem in coming years. This problem is

how to promote recovery from the Great Recession in the short run while reducing the Federal budget deficit and bringing down the national debt as a share of GDP in the long run.

The Clinton Administration's "financial markets strategy" might be called "crowding-in," because

it attempted to reduce government borrowing in order to increase private investment spending.

If Federal budget deficits crowd out investment, in the long run

potential output will grow more slowly, because there will be a smaller stock of buildings and equipment.

As incomes increased during World War II, price controls

resulted in shortages of goods. The existing supply was distributed using rationing.

Wars have usually been associated with economic booms and inflation. The Gulf War of 1990-91 corresponded with a recession, because

the added government spending for the war was small, and the economic uncertainty resulting from the war caused consumer and business spending to drop.

The standard deviation of real GDP growth from 1900 to 1949 was 7.9%, from 1950 to 1982, 2.9%, and from 1983 to 2007, 1.4%. This demonstrates that

the economy has become more stable.

One purpose of the secondary mortgage market is to

allow investors from all over the world to lend money for home mortgages in the U.S.

The 1985 Plaza Accord was

an agreement among the major economic powers to sell dollars in exchange markets, to bring down the value of the dollar.

The Federal Reserve has a policy problem when faced with stagflation. This is because

an increase in interest rates attacks inflation but makes unemployment worse, while a decrease in interest rates attacks unemployment but makes inflation worse.

If Greece had not adopted the euro, it could help solve its economic crisis by

devaluing its currency, to encourage exports, and increasing its money supply, to reduce interest rates and encourage investment.

If a homeowner is "under water" or "upside-down" on his or her mortgage,

the homeowner owes more on the mortgage than the house is worth.

The "Great Moderation" refers to

the period from the mid-1980s to 2007 when the U.S. economy experienced two long expansion, two short recessions, low inflation and falling interest rates.

The Phillips Curve shows

the relationship between the unemployment rate and the inflation rate.

In the secondary mortgage market

the rights to receive mortgage payments are bundled and sold as securities to investors.

Consider recession and inflation from the 1880's to the 2010's. Since the 1940's

there were fewer recession years, but inflation rates were high in both peace time and war time

Financial institutions such as Bear Stearns, Lehman Brothers, Fannie Mae and Freddie Mac failed in 2008 because

they had invested heavily in mortgage-backed securities which became worthless as home prices fell.