introduction macroeconomics ch 15

according to the Taylor rule, what is the federal funds target rate under the following​ conditions? ≻ Equilibrium real federal funds rate equals 4​% ≻Target rate of inflation equals 4​% ≻Current inflation rate equals 3​% ≻Real GDP is 1​% below potential real GDP The federal funds target rate equals _____%?

6.0%

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) can the​ Fed, therefore, eliminate​ recessions?

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

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

why did the Fed help JP Morgan Chase buy Bear​ Stearns?

a and c only a) commercial banks would be reluctant to lend to investment banks c) failure of Bear Stearns would lead to a larger investment bank failure

TABLE Year 2012 2013 Potential GDP 14.7 trillion (2012) 15.3 trillion (2013) Real GDP 14.7 trillion (2012) 15.4 trillion (2013) Price Level 110 (2012) 114 (2013) a) what can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of​ long-run macroeconomic​ equilibrium? if the​ Fed's policy is​ successful, what is the effect on the following​ indicators? actual real GDP _____ potential real GDP _____ price level _____ unemployment _____

a) The Fed will pursue a contractionary monetary policy b) decreases c) does not change d) decreases e) increases

The figure illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model if actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06​, we would expect the Federal Reserve Bank to pursue _____ monetary policy if the​ Fed's policy is​ successful, what is the effect of the policy on the following macroeconomic​ indicators? actual real GDP _____ potential real GDP _____ price level _____ unemployment _____

a) a contractionary b) decreases c) does not change d) decreases e) increases

when the Federal Open Market Committee​ (FOMC) decides to increase the money​ supply, it _____ US Treasury securities. if the FOMC wishes to decrease the money​ supply, it _____

a) buys b) sells

the figure illustrates a dynamic AD-AS model a) suppose the economy is in equilibrium in the first period at point A. In the second​ period, the economy reaches point B. we would expect the Fed to pursue what type of policy in order to move AD2 to AD2, policy and reach equilibrium​ (point C) in the second​ period? _____ if the Federal Reserve​ Bank's policy is​ successful, what is the effect on the following macroeconomic​ indicators? actual real GDP _____ potential real GDP _____ price level _____ unemployment _____

a) expansionary monetary policy b) increases c) does not change d) increases e) decreases

how do investment banks differ from commercial​ banks?

a) investment banks do not take deposits b) investment banks generally do not lend to households

which of the following is a monetary policy goal of the Federal Reserve bank​ (the Fed)?

a) low unemployment b) higher living standards c) stable financial markets

The Fed changes the discount rate as a part of its policy to reach all of the following objectives​:

a) stability of financial markets and institutions b) economic growth c) price stability

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?

a) the value of the dollar b) business investment projects c) consumption of durable goods

in the figure to the​ right, the economy experiences inflation in the second period. what would be the​ Fed's reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS2​?

all of the above a) increase interest rates b) open market sale government securities c) contractionary policy

in the figure to the​ right, when the money supply increased from MS1 to MS2​, the equilibrium interest rate fell from​ 4% to​ 3%. why?

all of the above a) initially, firms hold more money than they want relative to other financial assets b) increased demand for Treasury securities drives up their prices c) increased demand for Treasury securities drives down their interest rate

consider the figures below and determine which is the best description of what causes the shift from AD1 to AD2

both a and b a) example a shows a contractionary monetary policy. The price level and real GDP both fall b) example b shows an expansionary monetary policy. The price level and real GDP both rise

what is inflation​ targeting?

committing the central bank to achieve an announced level of inflation

in the​ figure, the opportunity cost of holding money _____ when moving from Point A to Point B on the money demand curve

decreases

The Fed changes the discount rate as a part of its policy to reach all of the following objectives​ except:

high unemployment

procyclical policy

if the Fed is late in recognizing a​ recession, the implementation of an expansionary monetary policy to reduce the severity of the recession could potentially take effect during the next expansion

in the​ figure, which of the following events is most likely to cause a shift in the money demand​ (MD) curve from MD1 to MD2 (Point A to Point C)​?

increase in real GDP or increase in the price level

the federal funds rate

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

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

low prices

consider the figure. can the Fed achieve a​ $900 billion money supply​ (MS) AND a​ 5% interest rate​ (point C)?

no. The Fed cannot target both the money supply and the interest rate simultaneously

The figure illustrates a dynamic AD-AS model suppose the economy is in equilibrium in the first period at point A. In the second​ period, the economy reaches point B. what policy would the Fed likely pursue in order to move AD2 to AD2, policy and reach equilibrium​ (point C) in the second​ period?

open market purchase of government securities

suppose the economy is in equilibrium in the first period at point A. In the second​ period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD2 to AD2, policy and reach equilibrium​ (point C) in the second​ period? ​ (what policy will increase the price level and increase actual real​ GDP?)

open market purchase of government securities

if the Federal Reserve is late to recognize a recession and implements an expansionary policy too​ late, the result could be an increase in inflation during the beginning of the next phase. even though the goal had been to reduce the severity of the​ recession, the poor timing caused another​ problem: inflation. this is an example of what type of​ policy?

procyclical policy

the _____ is considered the most relevant interest rate when conducting monetary policy

short-term nominal interest rate

as the figure to the right​ indicates, the Fed can affect both the money supply and interest rates.​ However, in recent​ years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed​ target?

the federal funds rate

Federal funds rate

the interest rate banks charge each other for overnight loans

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

​"Fannie Mae" and​ "Freddie Mac"