Macro Final Chapters 11, 12, 13, 14, 19

In recent​ years, a number of members of Congress have sponsored bills that would subject the Fed to audits of its monetary policy. This is a form of intensive Congressional oversight. What are the pros and cons of more Congressional oversight of the​ Fed? Increased oversight can

create pressure to help finance a​ country's government deficit by creating money.

Another way to describe the broken windows fallacy is to say that we often concentrate on what we see and not on what we do not see. How does this way of expressing the fallacy relate to government public works in a classical​ world? In the classical​ world, government public works will

crowd out private expenditures if the economy is at full employment.

In the late​ 1960s, inflation in the United States began to exceed inflation in other​ countries, and a U.S. balance of payments deficit emerged. When President Richard Nixon devalued the U.S. dollar in​ 1971, the devaluation ? the U.S. balance of payments deficit.

did not stop

The ? interest rate is the interest rate quoted in the market. The ? interest rate is the the nominal interest rate minus the inflation rate.

nominal, real

With the savings​ function,

savings will increase with the level of GDP.

If a financial intermediary buys loans from a mortgage company and then packages them to sell in the financial​ markets, this is known as

securitization.

If you strongly believed that the Federal Reserve was going to surprise the markets and increase interest​ rates, you would want to ? bonds.

sell

To decrease the supply of​ money, the Fed should ? bonds.

sell

The government ? foreign currency for dollars if it wants to peg the exchange rate at a higher rate than would normally prevail in the market.

sells

If housing prices fall​, you would expect the consumption function to

shift downward.

A higher level of autonomous consumption but no change in MPC will

shift the entire consumption function upward and parallel to its original position.

If consumer confidence increases​, then the consumption function will

shift upward.

As the price level​ falls, the planned expenditures line ? , which increases the equilibrium level of output. The ? shows the combination of prices and equilibrium output. Increases in planned expenditures that are not directly caused by changes in price will cause a ? the aggregate demand curve to the ? .

shifts up vertically, income expenditure model, shift of, right

The income-expenditure model is most appropriate for

short-run analysis

Credit cards are not considered part of the money supply​ because:

they are a loan which you have to use money to pay for later.

The Fed can supply funds to the markets in the case of a financial panic because

they are the lender of last resort.

If government spending increases by ​$5 billion and the marginal propensity to consume is 0.60​, GDP will increase by ​$ ? billion.

$12.5 billion (increase in GDP = increase in spending x 1/1 - MPC)

A simple consumption function is equal to​ ___________, where Upper C Subscript a is autonomous​ consumption, b is the​ MPC, and y is the level of income.

Ca + by

A stress tests for banks is a method to determine if bank buildings are strong enough to withstand a major earthquake.

False

Not much U.S. currency is in global circulation because it is an unsafe asset compared to assets denominated in foreign currency.

False

Securitization means borrowing money to invest.

False

The Bretton Woods agreement broke down in the early 1970s because Germany had too high an inflation rate relative to the United States.

False

The Fed directly controls​ long-term interest rates.

False

The San Francisco Federal Reserve Bank is the only one in the West because San Francisco outbid Sacramento to be its host.

False

The law of one price provides accurate predictions of current exchange rates.

False

Through its effect on money​ demand, a decrease in prices will increase interest rates.

False

When European countries joined together to create the​ euro, they created a​ strong, central fiscal authority to unify the finances of its members.

False

In​ 1973, several major companies went bankrupt and were not going to be able to pay interest on their​ short-term loans. This caused a crisis in the market. There was concern that the​ short-term credit market would​ collapse, and that even healthy corporations would not be able to borrow. How did the Fed handle this​ situation?

The Fed extended additional credit to make sure the economy had plenty of liquidity.

Recently the members of the FOMC have been asked to make predictions for future interest rates and then these have been made public. What is the rationale for this​ policy?

The Fed wants to better control expectations about​ long-term interest rates.

Traditionally, savings and loan institutions made loans only for home mortgages and held on to those mortgages. At one​ point, this was viewed as a safe way of doing business.​ However, this became a risky way of doing business for U.S. savings and loans in the 1970s. a. Why would making loans only for housing and holding on to the mortgages be very​ risky? b. Why does this provide a rationale for institutions such as Fannie Mae and Freddy​ Mac?

a. Because the lender would be very subject to risk and price movements of the real estate market. b. Because they take mortgages and separate them into assets that can be part of a diversified portfolio.

a. In the diagram to the​ right, if output equals y0​, the level of expenditures is equal to b. At the level of​ output, y1​, the corresponding level of expenditures fall ? the 45 degree line. c. The planned expenditures line is shown by C + I. As for the relationship between output and planned​ expenditures, when output exceeds the equilibrium​ output,

a. C + I, or the height of point a0. b. below c. expenditures fall short of output and output begins to fall.

a. Suppose the United States adopted policies to reduce imports from Europe. As a consequence of​ this, b. Suppose, in response to U.S. policies of reducing imports from​ Europe, the Europeans decide to restrict imports from the United States. As a consequence of such a European​ policy, c. During the​ 1930s, many countries in the world ---- including the United States ----tried to help their own countries by restricting imported goods. As a​ result, the volume of world trade ? in the 1930s.

a. European exports to the United States would be reduced and European equilibrium income would be lower. b. exports of the United States would decline and equilibrium income in the United States would be lower. c. fell

a. Suppose clothing stores anticipate a good fashion season and add substantially to inventories in their stores. As a result of​ this, b. Suppose economists see that inventories are suddenly increasing. Which of the following may be causing this increase in​ inventories?

a. GDP will increase since planned increases in inventory adds to planned expenditures. b. Decrease in demand for goods and services.

If the MPS is 0.70​, the marginal propensity to consume​, MPC​, must be equal to

0.30

The following information is available for the simple expenditure​ model: C​ = 200 ​+ 0.75y I​ = 150 Calculate the level of equilibrium output.

1,400 (y = C + I)

To help ensure political​ independence, each member of the Board of Governors is appointed to ? year terms.

14

If a project costs​ $100 and pays ​$108 next​ year, the maximum interest rate at which the present value of the investment exceeds its cost is

8%.

Economic research has shown that the chairman of the Federal Reserve is more​ powerful, relative to other committee​ members, than the head of the central bank in other countries. Fed chairpersons have much more influence over actual decisions than other members. Recall Professor​ Blinder's findings that committees make better decisions than individuals and that leaders of​ groups, per​ se, do not matter for the quality of decision making. Which of the statements below correctly relates​ Blinder's findings to the argument that the tradition of a strong chairman in the United States reduces the effectiveness of monetary​ policy?

A strong Fed chairman will cause the Board to act more like an​ individual, thereby reducing the ability to distinguish between trends and random events ---- a necessity for effective monetary policy.

Some central bankers have looked at asset​ prices, such as prices of​ stocks, to guide monetary policy. The idea is that if stock prices begin to​ rise, it might signal future inflation or an overheated economy. Which of the following variables should be examined when making monetary policy​ decisions?

All of the above.

Which of the following will decrease the supply of​ money?

Increasing reserve requirements.

The​ Q-theory of investment was developed by

James Tobin.

The economist who coined the phrase​ "animal spirits" to refer to investment spending by firms was

John Maynard Keynes.

? is an economist who believes that the Asian financial crisis was an example of market overreaction that could have been avoided by bolder actions from world organizations.

Joseph Stiglitz

The most basic measure of money in the United States is called

M1 and is the sum of currency in the hands of the​ public, demand​ deposits, other checkable​ deposits, and​ traveler's checks.

Which of the following appropriately describes the slope of the consumption​ function?

Marginal propensity to consume

Suppose the United States reported that the U.S. Treasury had increased its holdings of foreign currencies from last year. What does this tell you about the foreign exchange policies of the United States during the last​ year?

The U.S. government had intervened to decrease the price of the dollar.

Required Reserves

The amount of their deposits that banks are required by law to hold as reserves.

Owners' Equity

The funds provided to a bank by its owners.

Money market mutual funds typically invest in government securities and other financial instruments that can be easily bought and sold. They are not subject to reserve requirements​ and, in​ fact, hold minimal reserves.​ Banks, on the other​ hand, make loans to businesses for investment purposes. Prior to​ 2008, banks did not normally earn interest on reserves. Suppose that banks still do not earn any interest on reserves. If there were no reserve requirements for​ banks, how do you think their reserve holdings would compare to money market mutual​ funds?

The level of bank reserve holdings would be similar to those held by money market mutual funds since banks can earn more money by keeping reserves at minimal levels.

Reserves

The portion of​ banks' deposits set aside in either vault cash or as deposits at the Federal Reserve.

Liabilities

The sources of funds for a​ bank, including deposits and​ owners' equity.

Assets

The uses of the funds of a​ bank, including loans and reserves.

Which principle suggests that the demand for money should increase as prices​ increase?

The​ real-nominal principle.

Some countries have simply decided to let the U.S. dollar or another foreign currency serve as their local currency. This is called​ "dollarization." Why would a country decide to abandon its own currency and use a foreign​ currency?

To provide a stable and secure economic and investment climate.

An illiquid financial asset is one that cannot easily be used to buy goods and services.

True

As international trade becomes more​ important, monetary policy becomes more heavily influenced by developments in the foreign exchange markets. Go to the Web page of the Federal Reserve (www.federalreserve.gov) and read some recent speeches given by Fed officials. From these we see that international considerations do affect policy makers in the United States today.

True

Compared to fiscal​ policy, the outside lag for monetary policy is longer for monetary policy.

True

Investment is a smaller component of GDP than​ consumption, but it is much more volatile.

True

If the Fed set an interest rate on reserves close to the market interest rate on​ loans,

banks would have little incentive to make loans.

Money solves the problem of double coincidence of wants that would regularly occur under a system of

barter.

Suppose the interest rate on a​ two-year bond was higher than the interest rate on a​ one-year bond. The market must believe that next year​ one-year interest rates will

be above the current​ year's one-year bond rate.

If the economy were producing at a level of output higher than the equilibrium​ level, planned expenditures would be ? than total output or​ production, inventories would ? and firms would react by ? production. If the economy were producing at a level of output lower than the equilibrium​ level, planned expenditures would be ? than total​ output, inventories would ?​, and firms would react by ? production.

less, accumulate, decreasing, more, deplete, increasing

When reserves did not pay ​interest, banks

preferred to make loans rather than keep reserves.

You lost a lawsuit and owe someone​ $10,000. You offer to pay them​ $1,000 a year for 10 years. They agree to spreading your payments over​ time, but only if you pay​ $1,000 a year for 12 years. They make this counteroffer because they understood that the

present value of​ $1,000 a year for 10 years was less than​ $10,000.

Which of the following is not a key function of the Federal​ Reserve?

printing currency

Because investment spending moves in conjunction with​ GDP, investment spending​ is:

pro-cyclical

Since investment spending rises and falls with​ GDP, it is

pro-cyclical

The price of a bond is

promised payment/(1 + interest rate)

The theory of ? states that the exchange rate between two countries should be determined by the price levels in those two countries.

purchasing power parity

For the​ Fed, which lag tends to be shorter​?

inside lags

The largest component of Upper M 2 ​is/are

savings deposits

Individuals wishing to invest in Turkey in 2006 had two choices. They could invest in bonds that would pay returns in 2007 in Turkish lira and earn 14.7 percent.​ Or, they could invest in Turkish bonds that would pay returns in U.S. dollars but earn only 5.2 percent. Which of the following most closely approximates the​ market's expected rate of depreciation of the Turkish lira against the U.S.​ dollar?

9.5% or more.

Which of the following is a reason that the president of the New York Federal Reserve Bank is always a voting member of the Federal Open Market​ Committee?

All of the above.

Balance Sheet

An account statement for a bank that shows the sources of its funds​ (liabilities) as well as the uses of its funds​ (assets).

What conclusions can we draw when it comes to money​ demand?

An increase in prices or an increase in real GDP will increase money demand.

Excess Reserves

Any additional reserves that a bank holds above required reserves.

Until the early​ 1980s, Japan required its large insurance companies to invest all of their vast holdings in Japanese securities. At the prompting of the United​ States, Japan relaxed the restrictions and allowed the companies to invest anywhere in the world. What effect do you think this had on the​ yen/dollar exchange rate and the trade balance between the two​ countries?

Dollar appreciation and larger U.S. trade deficit with Japan.

Corporate​ bonds, retained​ earnings, and tax deductions are the three sources of funds that firms have for investment.

False

Deposits in checking accounts are not included in the definition of money because they are not a very liquid asset.

False

Equilibrium output occurs where planned output equals planned expenditures

False

Even though both insurance companies and banks are financial​ intermediaries, macroeconomists study insurance companies more intensively because insurance companies have a much larger and direct impact on the money supply.

False

Money market mutual funds are hard to classify in a definition of money because they are only held to facilitate transactions.

False

Which of the following statements is​ false?

If policymakers wanted to not affect the federal​ budget, government spending must increase more than taxes.

What happens to U.S. GDP when foreign countries experience​ prosperity?

It increases because the United States will export more product to those countries.

Consider the data on sovereign wealth funds​ at: http://www.swfinstitute.org/fund-rankings/ Accessed March​ 2015). Which three countries have the largest sovereign wealth​ funds?

Norway, United Arab​ Emirates, and China

Tax revenues typically rise along with GDP. Governments may typically spend some of this additional revenue on discretionary items in the budget. Assuming this is​ true, how does this complicate the work of analysts trying to determine the multiplier effects of discretionary spending on​ GDP?

Since​ non-defense spending often rises when GDP grows​ rapidly, the impact of discretionary spending on GDP is hard to isolate.

During the housing​ boom, overeager lenders were said to have made​ "ninja" loans ---- that ​is, loans to individuals with​ "no income,​ job, or​ assets." How did​ "ninja" loans contribute to the securitization crisis in financial markets in 2007 and​ 2008?

Some borrowers had limited ability to repay their mortgages and stopped making​ payments, causing the collapse of ​repackaged, securitized mortgages.

In an open​ economy, changes in monetary policy affect both interest rates and exchange rates. Comparing the United States and​ Switzerland, in which country would monetary policy have a more significant effect on GDP through changes in exchange​ rates?

Switzerland

In a closed economy with a government​ sector, equilibrium is determined where y​ = C​ + I​ + G. Which of the following is an alternative representation of the same equilibrium​ condition?

S​ + T​ = I​ + G

Hydroelectric dams are very costly to build and​ construct, but there are considerable savings in operating costs compared to other energy alternatives. Using the concept of present​ value, hydroelectric dams are more likely to be profitable when interest rates are low.

True

Interest rates typically rise in booms because the demand for money increases when real income rises.

True

One reason a bank can invest in illiquid loans​ (say, lend​ depositors' savings to home buyers over 25​ years) and still provide liquid deposits​ (provide depositors with their savings when they ask for​ it) is because depositors typically do not withdraw all of their deposits at the same time.

True

Proponents of solar energy point to the vast savings that come in the long run from using a free source of energy​ (the sun) rather than paying high prices for electricity. Unfortunately, solar energy systems typically have large​ up-front expenses to install the system. Using the concept of present​ value, solar energy systems are more likely to be profitable when interest rates are low.

True

Suppose the government said that they would not let the U.S. price for a barrel of oil fall below​ $50. They could do this by raising taxes on oil if the price fell below​ $50. By keeping the price of oil​ high, firms would have an incentive to invest in​ energy-saving technologies.

True

​Long-term interest rates are an average of the current​ short-term interest rate and expected future​ short-term rates.

True

Could the Fed purchase a wide variety of stocks in the market in order to raise the price of​ stocks?

Yes, but the problem would be that some stock prices would increase more than others.

Some critics of the​ Fed's actions with AIG and Bear Stearns said that the government was just bailing out failing financial firms and they should have been allowed to fail. The rationale of the Fed was

a complete collapse of the companies would devastate the financial system and cause a global panic.

A rise in exports will lead to

a larger increase in GDP due to the multiplier effect.

A change in the price level will cause ? the aggregate demand curve.

a movement along

Bitcoins are a new form of​ electronic, privately issued money that can potentially preserve the anonymity of transactions. The prices of a single Bitcoin has varied between​ $400 and​ $1,200 in recent years. From the point of view of money as a store of​ value, Bitcoins are

a poor store of value because their prices fluctuate too much.

Economists have long noted that​ non-traded goods are cheaper in countries with lower GDP. For​ example, in the United​ States, only the​ very, very rich have​ live-in help, but that is quite common in India for upper​ middle-class families. a. Under these​ circumstances, would you expect purchasing power parity to be an accurate theory of exchange rates in the long​ run? b. Assuming that Big Macs use​ non-traded goods in their​ production, Big Macs should be ? expensive in countries with the highest GDPs.

a. No, because the law of one price does not hold for​ non-traded goods. b. more

When the Federal Reserve makes a loan to a bank or financial​ institution, it requires the institution to specify certain assets the Federal Reserve can take possession of if the loan is not repaid. These assets are known as collateral. When the Federal Reserve made its​ $30 billion loan to​ JPMorgan, it allowed JPMorgan to use some of the assets of Bear Stearns as collateral. a. Why was this risky for the Federal​ Reserve? b. Why was this a good deal for​ JPMorgan?

a. The quality of the collateralized assets of Bear Sterns was unknown. b. JPMorgan did not have to offer as much of its​ own, more valuable assets as collateral.

During the Great​ Depression, banks held excess reserves because they were concerned that depositors might be more inclined to withdraw funds from their accounts. At one​ point, the Fed became concerned about the​ "excess" reserves and raised the reserve requirements for banks. a. Assuming that banks were holding excess reserves for precautionary​ purposes, would they continue to hold excess reserves even after reserve requirements were​ raised? b. After the Fed raised the reserve​ requirement, the money supply would

a. Yes b. decrease.

Suppose an ATM connected to your own bank is installed right next to your apartment building. a. How will this affect the average amount of currency you carry around with​ you? b. If you withdraw funds at your ATM only from your checking​ account, will your action have any effect on total money​ demand?

a. You will carry less currency since it is convenient to leave your money holdings in the bank earning some interest. b. No, if this withdrawal is an action that facilitates your normal level of transactions.

The Federal Reserve is not​ the:

agency that decides the tax rate.

Gifts cards have grown in popularity as a mechanisms to give gifts. Cards are available for popular book stores and for coffee shops. a. Gift cards b. Traveler's checks are sold by

a. are not considered part of the money supply since they have a fixed value paid for in advance. b. banks and​ non-banks and can be used for purchases in any enterprise.

During the​ 1970s, President Ford proposed a tax cut combined with a decrease in government spending by the same​ amount, so as not to increase the budget deficit. a. If taxes and government spending are both reduced by the same​ amount, GDP will b. President Ford was worried that a tax cut would increase the budget deficit.​ Thus, he matched the tax cut by an equal cut in government spending. Although the budget deficit did not​ worsen, the economy experienced ? in spite of a tax​ cut, and GDP ? .

a. decrease by the same amount b. a contraction, fell by the amount of the tax cut

If investors began to think the stock market is becoming less ​risky, how will this belief affect the demand for​ money? a. The demand for money will b. This would have

a. decrease since people will prefer assets that have more risk and a higher return. b. more affect on M1 since money is a larger component of M1 than of M2.

a. Holding other factors​ constant, stock prices tend to fall when expected corporate earnings fall because lower expected corporate earnings ? ​investors' expectations about future​ dividends, ? the demand for stock and stock prices. b. When interest rates rise​, higher interest rates make borrowing ? ​expensive, ? the total level of investment. All other things being​ equal, when investment spending falls​, stock prices ?.

a. decrease, decreasing b. more, reducing, fall

According to economist Gabriel​ Zucman, Europe is actually a net creditor when the commonly used international financial data seem to show it is a net debtor. a. This is because the commonly used international financial data b. As a​ result, the asset holdings of residents of Europe are

a. does not take into account holdings of securities in tax havens. b. underestimated.

At any price​ level, the​ income-expenditure model determines the level of equilibrium output and the corresponding point on the

aggregate demand curve.

Suppose the U.S. is a major source of demand for world commodities and supplies of commodities are limited. a. Expansionary monetary policy could affect commodity prices because b. Following a monetary​ expansion, the value of the dollar will

a. domestic prices will rise as aggregate demand​ increases, and since supplies of commodities are​ limited, world prices will also rise. b. fall, resulting in greater foreign commodity​ demand, increasing commodity prices.

Consider both terms in the name of the​ "multiplier-accelerator" theory. a. The accelerator refers to the b. The multiplier refers to the

a. fact that investment depends on the change​ (or acceleration) in the rate of investment. b. impact of investment spending on GDP.

"Greeks have increased their holdings of euros in cash because they have great faith in the monetary system of​ Europe." a. This quote is b. The reason that the Greeks held cash in euros is because they

a. not accurate b. thought that Greece might exit the system and the older Greek currency would have less value.

a. Using the aggregate demand and the long run aggregate supply​ curve, what is the government multiplier in the very long​ run? b. If we think of recessions as the short​ run, and full employment as the long​ run, this result can explain the intuition that the multiplier during recessions is

a. zero b. higher than the multiplier near full employment because in the short​ run, the multiplier is larger than in the long run.

One way to avoid some of the difficulties of fixing exchange rates between countries is to

abolish individual currencies and establish a single currency.

Economists Kenneth Rogoff and Carmen Reinhardt have written a number of papers about the lessons we can learn from financial crisis. Read the paper they wrote for the International Monetary​ Fund, "Financial and Sovereign Debt​ Crises: Some Lessons Learned and Those​ Forgotten," available​ at: https://www.imf.org/external/pubs/ft/wp/2013/wp13266.pdf​ (Accessed March​ 2015). They believe that the lessons learned in dealing with debt crisis in developing countries ? apply to developed countries.

also

As a​ country's income​ increases, imports will

also increase

A shift in the demand for dollars and away from euros will ? the dollar against the euro.

appreciate

A decrease in the supply of money will cause a​ country's currency to

appreciate.

The dollar ? against the euro when the European central bank lowers interest rates.

appreciates

Banks consider loans they make to be ? . If a customer brings in​ $2,000 to deposit into a checking​ account, it is ? for the bank. If a customer enters the bank and secures a​ $2,000 personal​ loan, it is ? for the bank.

assets, a liability, an asset

According to the paradox of​ thrift, when investment is autonomous and independent of income or​ output, if people wish to save​ more, equilibrium aggregate savings in the​ economy:

at​ equilibrium, aggregate savings must be equal to aggregate investment.

In the story that opened this​ chapter, we saw that China and the U.S had more aggressive stimulus policies than France and the United Kingdom. But China and the U.S. also have a lower level of government spending as a share of GDP compared to those other countries. Assume that the level of government spending as a share of GDP is a good proxy for the size of automatic stabilizers. France and the United Kingdom could have had smaller stimulus plans because they

believed that they had enough stabilization from automatic stabilizers.

To increase the level of output in the short​ run, the Fed​ should:

conduct an open market purchase.

Economists believed the increase in housing prices after 2002 was related to the fall in household savings that was also observed during that period because increases in

consumer wealth will cause an increase in autonomous consumption.

Planned expenditures in the most basic model are equal to

consumption and investment.

he Federal Reserve arranged for JPMorgan Chase​ & Co. to ? Bear Stearns during the financial crisis in 2008.

buy

If the Federal Reserve wishes to increase the money supply to stimulate the​ economy, it

buys government bonds from the private sector in open market purchases.

Devastating​ hurricanes, such as those that afflicted the Gulf Coast during the first decade of the 2000s are terrible events.​ Yet, economists believe that GDP typically rises after them. Explain why this happens and whether that means that hurricanes are really​ "good things." Hurricanes

can actually stimulate GDP because of the direct effects and the multiplier effects associated with the rebuilding expenditures.

People often like to visit flea markets to look for unexpected opportunities. Flea markets also typically use cash. This is an example of the liquidity demand for money because

cash purchases are​ expected, and cash is the most liquid asset.

In the United​ States, the

chairperson of the Board of Governors is required to report to Congress on a regular basis.

Suppose the wealth effect is very​ small, that​ is, a large fall in prices will not increase consumption by very much. In this​ case, the aggregate demand curve will have a steep slope because the slope of the aggregate demand curve is

change in P/change in y, and the change in y is small, making the slope steep.

The Fed provides a system of check collection and

clearing.

The three functions of money do not include money as a

collectible.

Although John Maynard Keynes is best known today for his book The General Theory of​ Employment, Interest, and Money​, he made other important contributions as well. Keynes ? and ?

condemned peace treaty negotiators for payments that Germany was required to make to the Allies, played a prominent role at the Bretton Woods Conference which established the postwar world monetary system.

The balance of payments consists of three types of international​ transactions: The ? account is equal to net exports plus net income from existing investments abroad and net transfers from abroad. The ? account is the value of a​ country's net sales of assets. The ? account is the net value of a​ country's capital transfers and the purchase or sale of​ non-produced, non-financial assets. The sum of these accounts is ?

current financial capital zero

According to latest data on the U.S. international investment​ position, the United States is a net

debtor.

An increase in the tax rate will ? the government spending multiplier.

decrease

If a country borrows in​ dollars, an appreciation of its own currency against the dollar will ? the burden of its debt.

decrease

Suppose inflation in the United States rose to around 8 percent a​ year; this would ? the demand for U.S. currency by foreigners.

decrease

The present value of lottery winnings paid over a​ 20-year period will ? with an increase in interest rates.

decrease

The quantity of money demanded will ? as the interest rate rises.

decrease

​Occasionally, some economists or politicians suggest that the Secretary of the Treasury become a member of the Federal Open Market Committee. This would most likely ? the independence of the Federal Reserve.

decrease

A decrease in government spending and taxes by the same amount will

decrease GDP by the same amount.

If you write a check from your checking account to your money market​ account, M1 will ? and M2 will ?

decrease, remain the same.

An increase in the price level will ? GDP and thereby move the economy ? the aggregate demand curve.

decrease, up

As real interest rates rise​, investment spending in the economy will

decrease.

If a central bank raised the interest rates it paid on​ reserves, the supply of money would

decrease.

If interest rates increase​, the present value of a fixed payment in the future will

decrease.

Open market purchases lead to rising bond​ prices, which cause interest rates to

decrease.

When the U.S. price level decreases but the nominal exchange rate remains the​ same, the real exchange rate will

decrease.

In recent​ years, debit cards have become popular. Debit cards allow the holder of the card to pay a merchant for goods and services directly from a checking account. The introduction of debit cards most likely ? had no impact on the amount of currency in the economy.

decreased

The United States has a large ? on the current​ account, but a large ? on the financial account.

deficit, surplus

In the​ 1990s, Argentina pegged its currency to the dollar. As the dollar appreciated in world​ markets, this caused an increase in​ Argentina's trade

deficit.

Following the Great​ Depression, the likelihood of​ "runs" on banks has been greatly reduced because of the creation​ of:

deposit insurance.

The dollar ? against the euro when the inflation rate in the United States increases.

depreciates

Given the changes in the location of economic activity that have occurred since the founding of the Federal​ Reserve, how would the location of the regional banks change if they were allocated by economic​ activity? The locations of the banks and the branches would be ? since economic activity has geographically shifted. There would probably be more banks in the West ? , and the ? district would be​ smaller, or have more banks.

different, West, San Fransisco

Banks borrow from the Fed at​ the:

discount rate.

Financial intermediaries reduce the risk of assets​ through:

diversification.

The price of a stock can be thought of as the present value of​ future:

dividends.

At any point on the 45 degree line, planned expenditures are

equal to output or income

Lower U.S. interest rates brought on by the Fed will cause the exchange rate to

fall, decreasing the value of a dollar​ (which is called​ depreciation).

Banks trade reserves with one another in​ the:

federal funds market.

When a​ firm's stock price is​ high, it can issue shares at a premium and use the proceeds from their sale to finance new investments. The higher a​ firm's share​ price, the ? shares the firm needs to sell to raise capital. This​ means, essentially, that the cost of the project the firm wants to undertake ? as the​ company's stock price climbs. In other​ words, ? stock prices lead to high investment.

fewer, falls, high

A ? exchange rate system is a currency system in which exchange rates are determined by free markets. A ? exchange rate system is a system in which governments peg exchange rates to prevent their currencies from fluctuating. A balance of payments ? can occur under a ? exchange rate​ system, which is a situation in which the supply of a​ country's currency exceeds the demand for the currency at the current exchange rate. ? is an increase in the exchange rate to which a currency is pegged under a fixed exchange rate system.

flexible fixed deficit, fixed Revaluation

Economists call efforts to influence the exchange rate

foreign exchange market intervention.

It can be extremely difficult to maintain a fixed exchange rate when

funds can move quickly from country to country in capital markets.

The aggregate demand curve will shift to the left​, and equilibrium income will decrease​, if

government expenditures decrease.

The government spending multiplier is ? the tax multiplier.

greater than

In​ 2014, a major bank paid the government​ $13 billion to settle a lawsuit. This payment immediately ? assets, ? liabilities, and ? owners' equity.

had no effect on, had no effect on, decreased

In a financial crisis like those that occurred in 2001 and​ 2008, the Fed can

help stabilize the economy by adjusting its policies and relationships with banks.

When the Federal Reserve purchases bonds on the open​ market, it leads to ? levels of investment and output in the economy.

higher

In pursuing its policies of quantitative​ easing, the Fed increased the size of its balance sheet through purchases of assets. Since balance sheets have to​ "balance," the​ Fed's increase in liabilities was

in the form of additional bank reserves from the asset purchase.

Suppose foreign countries grow more rapidly than anticipated and U.S. exports to these countries also grow. As a​ result,

income of the United States increases​, which leads to a rightward shift of the U.S. aggregate demand curve.

A decrease in the marginal propensity to import will ? the multiplier for investment spending.

increase

During the​ 1980s, banks started to pay interest​ (at low​ rates) on checking accounts for the first time. Given what you know about opportunity​ costs, the interest paid on checking accounts would ? the demand for money.

increase

If the MPC increases​, the value of the multiplier will

increase

The Chinese government purchased U.S. dollars in the foreign exchange market with Chinese currency. During the same​ period, the Chinese sharply raised the reserve requirement on banks because they wanted to prevent the money supply from expanding too rapidly. The effect of the Chinese​ government's purchase of U.S. dollars in the foreign exchange market with Chinese currency would be to ? the supply of Chinese currency. Since the Chinese wanted to prevent the money supply from expanding too​ rapidly, they raised the reserve requirement on​ banks, ? the ability of banks to make​ loans, thereby ? the Chinese money supply.

increase reducing, decreasing

When the stock market rose from 2009 to​ 2015, many people near retirement found that the balances in their account had​ increased; however, in the preceding two​ years, their balances had fallen. In response to the recent increase in stock​ prices, consumers would generally

increase consumption spending due to the wealth effect.

An open market purchase will ? the supply of​ money, which will cause the interest rate to ? , which will ? investment, which results in ? in output.

increase, decrease, increase, an increase

If the real U.S. dollar​ appreciates, prices of U.S. goods will ? relative to foreign goods. This will ? U.S. exports because U.S. goods will become ? expensive. On the other​ hand, imports to the U.S. will ? because foreign goods have become ? expensive.

increase, reduce, more, increase, less

If the Fed purchased​ long-term government bonds held by the​ public, then the supply of money would

increase.

If the MPC increases​, the slope of the consumption function will

increase.

When the U.S. and foreign price levels remain the same but the dollar appreciates​, the real exchange rate will

increase.

Since World War​ II, continuous use of automatic stabilizers has ?. This has led the U.S. economy to become ? stable over the past 60 years.

increased, more

When prices rose in Mexico slower than in the United States and the nominal exchange rate remained​ constant, the real exchange rate

increased.

Many countries believe that they need to increase exports in order to grow. Some of this belief is based on​ long-run considerations, as competing in export markets may induce their firms to innovate. But some countries also focus on the​ short-run benefits. These benefits include

increased​ short-run GDP and employment which multiplies throughout the economy.

When the Federal Reserve conducts an open market purchase of government​ bonds, the money supply

increases and interest rates decrease.

The present value of a given payment in the future

increases as the interest rate decreases.

The tax multiplier is negative because

increases in taxes decrease disposable personal income and lead to a reduction in consumption spending.

If planned expenditures are currently lower than output, then inventories must be

increasing

The types of lags in policy are

inside lags​ (the time it takes for policymakers to recognize and implement policy​ changes) and outside lags​ (the time it takes for policy to actually​ work).

Rely on the ideas of​ "animal spirits" to complete the following sentence. Changes in measures of consumer confidence would be correlated to consumer spending on durable goods because people would be

irrationally confident and therefore more willing to purchase durable goods such as furniture and appliances.

Silver

is a good example of commodity money.

When housing prices​ rose, some households took out a larger loan on their homes and used the additional funds they borrowed to finance purchases of consumer durables. This option is not available when housing prices fall. The wealth effect might be larger for increases in housing prices than decreases in housing prices because

it is easier to increase spending than it is to decrease spending.

The demand for money depends ? on the interest rate and ? on the level of prices and real GDP.

negatively, positively

Relying on the website for the Federal Reserve Bank of St. Louis ​(www.research.stlouisfed.org/fred2), investment in residential housing over the​ 1990-1991 recession and the period from 2006 to 2011 is shown below. From the​ data, we can see that investment in residential housing fell

less in the 1990-91 period.

Banks create money by

making loans which increases deposits because the required reserve ratio is a fraction of deposits.

When European countries joined together to create the​ euro, they no longer were able to conduct independent ? policy.

monetary

The Federal Open Market Committee​ (FOMC) votes​ on:

monetary policy.

Two households both have loans on their homes that are​ "underwater." Household A has other assets such as checking​ accounts, but Household B does not. Consider the research about the effects of reducing the amount each household owes on its loans on the spending by the two households. The research shows that those households with the largest debt burdens cut their spending ? than households with lower debt burdens.

more

Unlike the United States which has high levels of interstate​ mobility, labor is less mobile from one part of Europe to the​ other, because workers would have to move from one country to another. This poses challenges for the viability of the euro system because with less labor​ mobility, there will be

more adjustments in wages and prices in each country as economic conditions change.

In​ 1933, in order to prevent banking panics from happening​ again, the U.S. government began

providing deposit insurance that guarantees the government will reimburse depositors should their banks fail.

A theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries is

purchasing power parity.

Refrigerators and clothing are to some extent durable goods. The decision to purchase a refrigerator is likely to be more sensitive to interest rates than the decision to buy clothing​ because:

refrigerators are expensive and sometimes payment is financed.

According to the paradox of​ thrift, when investment is autonomous and independent of income or​ output, if people wish to save​ more, equilibrium aggregate savings in the​ economy:

remain unchanged.

Banks are required by law to keep a fraction of their deposits as

reserves.

Research suggests the effects of monetary policy through interest​ rates, exchange​ rates, and net exports are more rapid than the effects of monetary policy on investment. The more open an economy​ is, the ? the outside lag related to monetary policy.

shorter

The tax multiplier is

smaller than the government spending multiplier because an increase in taxes first reduces disposable income of households and with an MPC less than​ one, the decrease in consumer spending is less than the increase in taxes.

Net transfers from abroad are a ? entry on the current account.

surplus (positive)

If there is an excess demand of a​ country's currency at the fixed exchange​ rate, there is a balance of payments

surplus.

Automatic stabilizers prevent consumption from falling as much in bad times and from rising as much in good times because

tax rates lower the multiplier and make the economy less susceptible to shocks.

Decisions about the supply of money are made by

the Federal Open Market Committee which includes the seven members on the Board of Governors and the president of the New York Federal Reserve Bank.

It is generally recognized that the​ world-wide financial crisis in 2008 originated in the United​ States, as its financial institutions were most active in fueling the housing boom.​ However, investors throughout the world had bought U.S.​ mortgage-related securities and this spread the global crisis. When the crisis​ hit, however, the value of the U.S. dollar rose sharply against many other currencies. This appreciation could have occurred because

the demand for dollars rose since the dollar was considered a safe currency.

In​ 2010, interest rates on home mortgages were in the neighborhood of five percent ---- very low by historical standards ---- but many individuals did not wish to buy homes. Low interest rates did not entice new buyers because

the inflation rate was low enough that the real interest rate was relatively high.

We measure the opportunity cost of holding money​ with:

the interest rate.

In the​ income-expenditure model, the equilibrium level of output is

the level of GDP at which planned expenditure equals the amount that is produced.

Which of the following is one way that the Fed cannot change the supply of​ money?

the process of printing money

The demand for money arising from individual and business use in ordinary business is the

transaction demand.

Based on the data in the table in the application, the Mexican peso is

undervalued with respect to the dollar because the price of a Big Mac in Mexico in dollars is less than the price of a Big Mac in the United States.

If Japan decides to buy more goods from the United​ States, the demand line will shift ? by the increase in exports. This will ? equilibrium income. The ? in income will be ? than the increase in exports because of the ? effect.

up vertically, increase, increase, larger, multiplier

Suppose you have​ $500,000 to purchase an annuity. Currently the annuity payments are​ $35,000 per year as long as you live. If interest rates​ increased, the annuity payments

will increase since the present value of future payments will fall as the interest rate rises.

If a bank fails a stress​ test, the Fed

will not let a bank pay dividends to its shareholders.

It is bad financial planning to invest your pension in the stock of your own company because

you are failing to​ diversify, creating more risk for yourself.

The capital​, current​, and financial accounts must sum to

zero.

When Hurricane Sandy hit the East Coast in​ 2012, houses were destroyed and later many were rebuilt. Immediately after the​ hurricane, total wealth

​decreased, but after​ rebuilding, the level of income increased.

Investment spending is more volatile than consumption because investment spending is

​pro-cyclical, exaggerating fluctuations in GDP.

The Federal Reserve targets

​short-term interest​ rates, such as the rate in the market at which banks trade reserves​ overnight, the federal funds rate.