HW Chapter 11-15
When governments increase expenditures it is known as
expansionary fiscal policy
When central banks increase the money supply and take steps to lower interest rate it is known as
expansionary monetary policy
The velocity of money indicates the number of times, on average, that each unit of the money stock is used in the purchase of _________ goods and services
final
What is liquidity?
funds that are available for immediate payment
a rise in overall expansion dues to an expansionary monetary policy raises the price of firm Z's cars
government policies
corporate taxes in the country are decreased by 5%
government policies
interest rates are lowered by 1.5% to attract investment
government policies
if wages were flexible, employment would have been ________ employment with rigid wages
higher than
While economic booms are generally positive, they also can have a dark side, this is because
if the economy is close to full employment and full capacity utilization before the beginning of the boom, the economy might eventually experience a leftward shift in labor demand, causing a recession rather than a gentle fall to pre-boom levels
How did the fall in housing prices cause the entire financial system in the United states to freeze up? The fall in housing prices resulted in _________, leading to enormous __________, disrupting the banks' ability and willingness to make loans to ___________
increased defaults, bank losses, consumers and firms
When the Fed buys government bonds from private banks, it __________ the electronic reserves that banks hold
increases
The real wage is the
inflation-adjusted wage
The Federal Reserve conducts open market operations when it wants to
influence the federal funds rate
The federal funds rate is the
interest rate in the federal funds market where banks obtain overnight loans of reserves from one another
Okun's Law
is usually an accurate representation of data
Which of the following statements correctly describes features/implications of real business cycle theory
it suggests that technological progress is an important determinant of long-term fluctuations in growth
According to the concept of persistence in the rate of growth, if the economy grows this quarter, it will
likely grow next quarter
Banks who took over a home where the owner defaulted often sold the house at a price that was ______ than the amount they lent to the homeowner
lower
a toy companies excess inventories get sold off
market forces
researchers develop a cheaper method of manufacturing steel
market forces
the employees - of firms which had to shut down- find other jobs
market forces
When labor demand shifts left at the start of the recession, the ultimate impact on employment and GDP will be:
negative, and larger if wages are fairly rigid
The average number of initial applications for unemployment insurance is likely to be ____________ with real GDP
negatively correlated
the national income identity shows that
output is a function of consumption, investment, government spending, and net exports
Consumer sentiment is likely to be ________ wit real GDP
positively correlated
The S&P 500 stock index is likely to be __________ with real GDP
positively correlated
The amount of new building permits for residential building is likely to be _________ with real GDP
positively correlated
The amount of new orders for capital goods unrelated to defense is likely to be _________ with real GDP
positively correlated
The average weekly hours worked by manufacturing workers is likely to be _________ with real GDP
positively correlated
Central banks have two primary goals that may be in conflict. These goals are economic growth and
price level stability
Lower interest rates can also
push prices higher
If a central bank wants to combat inflation it will typically
raise interest rates
Suppose the Fed conducts an open market purchase. Such an action would be called for if the economy faced the possibility of
recession
The funds that are lent in this market are
reserves at the Federal Reserve Bank
If an economic shock increases labor demand, equilibrium employment _______ and real GDP _______
rises, rises
Suppose the Fed wants to implement an anti-inflation monetary policy. For each of the tools listed below, indicate the direction of the Fed's action should take. The Fed should conduct an open market ______ of treasury bonds; The fed should _______ the reserve requirement; The Fed should _______ the interest rate paid on reserves deposited at the Fed; The Fed should ________ lending from its discount window
sale, raise, increase, contract
The Fed's open market purchase impacts the federal funds market by
shifting the supply of reserves to the right
economic fluctuations are
short-run changes in the growth of GDP
If wages are flexible, the increase in employment and real GDP will be _________ the increase if wages are rigid
smaller than
Fiat money is
something that is used as legal tender by government decree and is not backed by a physical commodity
Lowering interest rates is a common monetary policy tool used to
stimulate economic growth
According to real business cycle theory, the economic impact of changing input prices is similar to the economic impact from
technology changes
A central bank is the government institution ____________
that runs a country's monetary system
The recession of 2007-2009 affected the components of the national income identity by primarily affecting
the C and I components through a reduction in consumer wealth and a drop in housing construction
U.S. monetary policy decisions are made by:
the Federal Reserve Bank
According to Keynes's view on animal spirits, ____________
the economy could fluctuate beyond the level that could be explained by the underlying economic fundamentals
According to the quantity theory of money, the inflation rate is
the gap between the growth rate of money supply and the growth rate of real GDP
Why is the rise in housing prices between the late 1990's and 2006 characterized as a bubble by some economists
the large increase in the price of housing assets did not reflect the true-long run value of the assets
The failure of banks and other financial institutions created yet another multiplier effect on employment and unemployment for which of the following reasons
the remaining banks decreased new loans to consumers and businesses because they worried about more defaults, increasing the impact on employment and GDP
One major difference between modeling economic busts and booms is that
there is no issue of rigid nominal wages when modeling booms
In the United States, recessions are usually defined as
two consecutive quarters of negative growth in real GDP
Okuns Law states that
when growth in real GDP is above 2%, unemployment drops and when it is below 2%, unemployment increases
The factors that would shift the demand for reserves include
-a changing deposit base -anticipated liquidity shocks -an economic expansion or contraction
An example of a multiplier is when
-an increase in business confidence causes firms to increase production and hire employees, leading to an increase in household spending, causing firms to further increase production and employment -a drop in consumer confidence reduces spending, causing firms to cut production and lay off employees, leading to a greater reduction in household spending
If nominal GDP increases, what might be the cause of this increase? If nominal GDP increases, this could be caused by:
-an increase in real GDP -an increase in the price level
Other than open market operations, what tools does the Federal reserve use to manipulate interest rates in the economy
-changing the reserve requirement -changing the interest rate paid on reserves deposited at the Fed -quantitative easing -lending from the discount window
The functions of a central bank are to
-control certain key interest rates -monitor financial institutions -indirectly control the money supply
To achieve its target for the federal funds rate, the Fed may
-decrease lending from the discount window -increase the reserve requirement -sell treasury bonds in the open market -increase the interest rate paid on reserves deposited at the Fed
Countercyclical policy that seeks to raise GDP growth and the level of employment is appropriate when
-excessively pessimistic sentiments about the economy are prevalent -the economy is experiencing a recession
In practice, the risk associated with a negative interest rate are
-if banks make more customers pay to hold their money, the amount of bank deposits might go down, robbing lenders of a crucial source of funding -if more and more central banks use negative rates as a stimulus tool, there's a concern the policy might ultimately lead to a currency war of competitive devaluations -if banks absorb the cost of negative rates themselves, that squeezes their profits and might make them even less willing to lend
How does the zero lower bound on interest rates affect the working of monetary policy?
-it makes the implementation of expansionary monetary policy more difficult since it effectively blocks the central bank's use of its primary tool -it reduces the effectiveness of monetary policy by impairing the ability of the public (including investors) to understand the central banks actions and signals -it complicates the formulation of expansionary monetary policy because it forces the central bank to rely on nontraditional and less familiar tools such as quantitative easing
the bursting of the housing bubble also had an additional effect on consumption spending for which of the following reasons
-lower home prices made people feel poorer and decreased consumption spending -consumers could not continue to get home mortgages and spend at previous levels
According to the Taylor rule, the Federal Reserve should lower the federal funds rate when the
-output gap falls -Fed's long run target for the federal funds rate falls -inflation rate falls -Fed's inflation rate target rises
Following the Fed's successful open market purchase, the process that ensues is given by
-short-term interest rates fall -long-term interest rates fall -demand for goods and services increases -labor demand shifts right
the purpose of countercyclical policy is to
-smooth the growth rates of employment, GDP, and prices -reduce the intensity of economic fluctuations
Which of the following are consequences of an economic expansion when the labor market is already close to full employment?
-the optimism or other factors that originally triggered the boom may get reversed at some point and create negative multiplier effects - the boom is likely to generate a great deal of wage inflation and very little employment and output growth
In prison camps during World War II, and in some prisons today, cigarettes circulate among prisoners For example, an Ipod might cost 2 cartons of cigarettes, whereas a magazine might only cost 2 cigarettes Which functions of money are cigarettes fulfilling in this case?
-unit of account -store of value -medium of exchange
Countercyclical fiscal policy:
-uses changes in government expenditure and taxes to increase the growth rate of GDP -contractionary fiscal policy uses lower government expenditure to decrease the growth rate of real GDP
Which of the following are included in bank reserves for private banks?
-vault cash -deposits at the central bank
Suppose you need to get your house painted. You register with a barter Web site and want to offer your car cleaning services to someone who will paint your house in return. What are the problems you are likely to encounter?
-you might find it difficult to find someone who needs you to wash his care and is willing to paint your house in return -it may take a lot of time to negotiate and finally settle on a deal that you both find fair -it might be difficult to agree on how many car washes is equivalent to painting a house
What is the FED's target inflation?
2 percent
Briefly explain how an increase in the quantity of reserves that commercial banks hold at the Federal Reserve could lead to inflation
An increase in reserves triggers a multiple expansion of bank loans and deposits, which generates an increase in the stock of money. If the money supply grows faster than real GDP, inflation will occur
3 major national banks of country Y fail, which ultimately leads to a fall in the country's real GDP and employment
Financial/Monetary theory
an expansionary monetary policy increases the money supply in country A, which in turn leads to a fall in unemployment and a rise in real GDP
Financial/Monetary theory
Keynes's theory of multipliers involved an element of the self-fulfilling prophecy. Which of the following illustrates the concept of a self-fulfilling prophecy?
Firms expect an increase in demand in the future and so hire additional workers now, which leads to an increase in consumption demand
How does the Federal Reserve obtain a particular value for the federal funds rate?
It finds the point on the demand curve that corresponds to that federal funds rate and makes available the exact level of reserves associated with that point on the demand curve
A stock market rise in Country B leads to an increase in consumer confidence, employment, and production. These events reinforce themselves and the virtuous cycle continues
Keynesian theory
Country Z is in a recession. It will remain in this state until the government stimulates aggregate demand
Keynesian theory
Firm X expects a rise in the demand for their output in the future; they will increase their employment now
Keynesian theory
Almost everyday, many people sign their names to little pieces of paper called checks, which are then accepted in exchange for goods and services. Do these constitute money?
No, because checks simply represent a means of access to money, not money itself
Are credit cards money ?
No, because your credit cards are not assets
How would Keynes's concept of animal spirits explain the creation of a housing bubble?
People believed that a house was a worthwhile investment, which led to an increased demand for housing and thus pushed prices up. This confirmed to people that housing was a worthwhile investment, which led to more demand, resulting in an upward spiral driven by optimism
When workers are laid off , what happens to physical capital ?
Physical capital becomes less productive, leading firms to reduce capacity utilization
What is the significance of the real wage as it relates to inflation?
Since an increase in inflation reduces the real wage that firms must pay, firms are more willing to hire workers, thus stimulating economic activity
What is the dual mandate of the Federal Reserve bank?
The Fed is charged with maximizing employment and moderating inflation
If the inflation rate is negative, what must be true?
The growth rate of real GDP > the growth rate of the money supply
Based on the chapter's discussion of monetary and financial factors, how could the Federal Reserve's policies have contributed to the economic "bubble" of the pre-recession years of 2000-2006
The low federal funds rate also lowered mortgage rates, driving an increase in demand for housing, which in turn drove up real estate prices
Which of the following statements correctly describes the consequences of considering real wages instead of nominal wages in analyzing recession?
We would find that firms baser their hiring decisions on the ration of nominal wages to their output prices
The bursting of the housing bubble after 20066 was the major initial contributor to the 2007-2009 recession because: it was accompanied by ________ in the inventory of unsold homes; the price homebuilders could get for a new home ______; homebuilders responded by _______ the number of new homes they wanted to build; homebuilders responded by ________ the number of workers they hired to build new home; the effect on overall employment was ______ through its impact on related industries such as commercial real estate and consumer demand for products such as home appliances
an increase, fell, reducing, reducing, increased
an economic expansion begins
at the end of a recession
Is inflation good or bad?
both
Okun's Law is defined as
change in unemployment rate = -0.5(g-2%)
Suppose the households of this economy now expect the economy to grow in the future. Complete the following feedback loop reflecting the multiplier effects of this shock on a modern economy
consumption - rises investment - rises firm revenues - rises labor demand - rises unemployment - falls -household incomes -rise -asset prices - rise -mortgage defaults - fall -firm bankruptcies - fall -financial intermediation - rises
Monetary policy designed to curb inflation by slowing economic activity is known as ___________ monetary policy
contractionary
Recessions are periods in which the economy ________, while economic expansions are defined as the periods __________
contracts, between recessions
During recessions, firms typically prefer to achieve a reduction in employment by ___________ but if this is not sufficient for reducing employment quickly, they would have to
cutting back new hiring, engage in mass layoffs
An open market operation is
an exchange between a private bank and the Federal Reserve where the Fed buys or sells government bonds to private banks
Some barter Web sites allow the use of "barter dollars". The registration fee that you pay to a barter Web site gets converted into barter dollars that can be exchanged with other users to buy goods and services. Would the use of barter dollars resolve the problems you identified?
Yes, because you could both pay and be paid in "barter dollars"
If oil, which is a major input to most production processes, abruptly jumps in price, the impact on the economy would be similar to
a productivity decrease, with a resultant decrease in real GDP
The concept of multipliers was one of the key elements of John Maynard Keynes's theory of fluctuations. A multiplier is
an economic mechanism that causes an initial shocks to be amplified by follow-on effects
