Principles of Macroeconomics 14

Adjustable-rate mortgages

are mortgages whose interest rates can change.

Suppose a $1,000 bond has a coupon rate of 3%, but interest rates in the market double to 6%. If the risk of the bond remains the same, what would the bond now be worth?

$500

Perry deposits $10,000 in his bank account. If the reserve requirement is 15%, how much of this amount can his bank make in new loans?

$8,500

If the potential money multiplier is 4, then the reserve requirement is

0.25

Thanks you very much

Hope you do great Silas!

Which statement is TRUE?

Paper money constitutes 90% of currency.

Increased outsourcing by U.S. companies has contributed to the jobless recovery after the 2007-2009 recession.

True

Consider this T-account for your bank, which shows that you deposited $100 into your checking account and that your bank then made a $75 loan to Michelle. : Your bank's reserve ratio is

57.14%.

Which of these was a change in banks' lending practices that contributed to a housing bubble?

Banks began to originate subprime loans they did not intend to keep.

Which type of economist would be LEAST supportive of using monetary policy to correct fluctuations in an economy?

Classical

When government spending results in higher interest rates due to rising debt, what happens to consumption and investment according to a monetarist economist?

Consumption and investment decrease due to the crowding out effect.

If the Federal Reserve followed Milton Friedman's monetary rule, it would increase the money supply to fight recessions and decrease the money supply to fight inflation.

False

In open market operations, the Federal Reserve buys and sells gold on the open market to preserve the value of the dollar.

False

Monetary policy lags can last up to three years.

False

The main policymaking arm of the Fed is the

Federal Open Market Committee.

According to the rational expectations model, how would an announcement of expansionary monetary policy affect aggregate output?

It would have no effect on aggregate output.

José is putting money for college in a savings account. The bank makes the money available to business borrowers. In essence

José is supplying loanable funds for business investment.

Which statement concerning the function of money is incorrect?

Money does not lose value when inflation occurs.

In the equation of exchange, if M = $1.5 trillion, V = 7, and P = 1.05, then

Q = $10 trillion.

The price of bonds and the interest rate are inversely related.

True

(Figure: Shifts in SRAS and AD) Starting at equilibrium point d, if the cost of inputs rises, the short-run equilibrium will move to point _____, and thus real output will _____ and the price level will _____.

b; decrease; increase

(Figure: Policy Changes in the Short Run) To move the economy from point a to point b in the short run, policymakers implement _____ monetary policy, thereby accepting _____ to reduce _____.

contractionary; more unemployment; the rate of inflation

The 2007-2009 recession was caused by a(n)

decrease in aggregate demand triggered by a financial crisis.

One implication of the long-run Phillips curve is that

economic policies to keep the unemployment rate below its natural rate will lead to accelerating inflation.

If the economy is currently in short-run equilibrium at point a, what type of monetary policy would be most effective to bring the economy back to long-run equilibrium?

expansionary monetary policy to shift AD to the right

Corporate bonds generally have a _____ return on investment than do checking deposits because bonds are _____.

higher; riskier

One of the problems with deflation is that it

increases the real value of existing debt.

The short-run Phillips curve holds _____ constant.

inflationary expectations

The time policymakers must wait for the collection of economic data is known as a(n) _____ lag.

information

Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $10,000 bond. The impact on the banking system is a(n)

injection of $10,000 in new reserves.

Monetarists believe that in the short run, a change in the money supply can affect _____, while in the long run, a change in the money supply will affect _____ only.

output and the price level; the price level

Financial institutions

reduce information costs, reduce transaction costs, and diversify assets.

If the Federal Reserve wishes to raise interest rates, what does it need to do?

sell bonds to banks while reducing the money supply

(Figure: Market for Loanable Funds) The graph shows the supply and demand for loanable funds. If the market interest rate is 3%

there will be an excess supply of funds.

In May 2013, Brazilian president Dilma Rousseff said she would ensure that Brazil's central bank had the autonomy to do what was needed to tame inflation. Brazil's central bank would have to pursue a(n) _____ monetary policy. As a result, the dollar would _____ in value against the real (Brazil's currency), making U.S. exports to Brazil _____.

tight; fall; cheaper

Which of these is NOT a key role of financial institutions?

to increase interest rates charged to borrowers

A supply shock can be due to an increase in the price of oil.

True

Which of these is an example of money being used as a store of value?

A customer receives $3.05 in change and returns the next day to make another purchase.

One of the trigger points for the financial crisis of 2007-2009 was that Congress failed to balance the federal budget.

False

The Taylor rule states that the federal funds target rate is 2% plus one-half the inflation gap plus one-half the output gap.

False

The fractional reserve banking system does not allow customers to withdraw all of their money from the bank at once.

False

The only institutions bailed out by the Federal Reserve during the last financial crisis were commercial banks.

False

Suppose a country faces the following situation: inflation rate = 5%; target inflation rate = 2%; current federal funds rate = 3%; current GDP 4% below full-employment GDP; and long-run real GDP growth rate = 3%. Which statement correctly describes monetary policy actions that would be recommended according to the monetary rule, inflation targeting, and the Taylor rule?

The monetary rule would recommend ongoing steady expansion; inflation targeting would recommend contractionary policy; the Taylor rule would recommend expansionary policy.

The reward for saving is called _____, and this variable is placed on the _____ axis of the loanable funds market graph.

interest; vertical

(Figure: Natural Rate of Unemployment) The natural rate of unemployment

is 3%

Deflation can be a problem because it

makes it more difficult to pay off debt.

In the market for loanable funds, savers are shown on a(n) _____ curve.

upward-sloping supply

When Jay wins a contest, he is able to choose one prize from four options. He chooses a four-year certificate of deposit that will accumulate interest and cannot be cashed in until maturity. Given the options below, which prize would provide Jay with the largest value four years from now?

$1,100 with an interest rate of 3%

If the reserve requirement is 20%, the money multiplier is

5.

Alco Electronics needs to borrow money to pay for a large capital investment. It is deciding between getting a bank loan and issuing bonds. Which statement is TRUE about the options Alco is considering?

A bank loan is borrowing a large amount from one lender, while issuing bonds is borrowing small amounts from many lenders.

Which of these is a financial institution that sold credit default swaps insuring investors against securities defaults prior to the financial crisis in 2008?

American International Group (AIG)

Assume the Fed's target for unemployment is 4% to 5%, and its target for inflation is 2% to 3%. If the unemployment rate is 10% and the inflation rate is 2%, the Federal Reserve will most likely

Buy bonds

The discount rate is the rate that banks charge their best customers.

False

Which statement(s) is/are TRUE? I. Increasing the reserve requirement would decrease the money supply. II. Decreasing the discount rate would decrease the money supply. III. Buying government bonds would increase the money supply.

I and III only

What is the main argument against using a strict monetary rule in managing an economy?

It would worsen a recession if the inflation was caused by a negative supply shock.

Which statement is correct?

M2 includes M1.

Johnny claims that inflation next year will be 5% because the inflation rate in the past two years has been 5%. Which theorist would be vindicated by this behavior?

Milton Friedman

Which of these is NOT involved in regulating financial markets?

New York Stock Exchange

Which statement correctly describes the sequence that explains how a contractionary monetary policy impacts an economy?

The policy raises interest rates; higher interest rates reduce spending; and lower spending reduces aggregate demand, which impacts output and the price level.

Why have many Americans' retirement accounts regained much of their lost value since the 2007-2009 stock market crash?

They were able to buy more stocks for a cheaper value when the market price was low.

About 2/3 of U.S. dollars are held outside the United States.

True

According to the original Phillips curve, there is an inverse relationship between money wages and the unemployment level.

True

Monetary targeting tends to keep aggregate demand relatively stable.

True

One of the responsibilities of the Federal Reserve Bank is to serve as the banker for the U.S. Treasury.

True

Rational expectations are forward looking, since they assume that people will make use of all available information.

True

The Fed has been successful at keeping the federal funds rate near the target.

True

The reserve ratio is the amount of reserves a bank holds as a percentage of total deposits.

True

If banks increase excess reserves to increase their ability to absorb a higher rate of defaults, the _____ multiplier will _____.

actual; fall

Assume that inflation rates for the past 5 years have been 1%, 2%, 2.5%, 2%, 2%. The Federal Reserve announces that it is going to decrease the money supply because it is concerned about inflationary pressures in the economy. If people form their expectations _____, then in light of the Fed's announcement, they will expect an inflation rate of _____.

adaptively; 1.9%

(Figure: Aggregate Supply and Demand Shifts) The economy is originally at its long-run equilibrium, SRAS0 and AD0. Government policymakers signal that they intend to reduce aggregate demand from AD0 to AD1. If we assume that individuals have rational expectations, then the shift from SRAS0 to SRAS1 will happen

almost immediately.

What were the primary causes of the 2007-2009 U.S. financial crisis?

low interest rates, improperly managed financial risk, and easy lending standards

Money is considered a _____ because it is generally accepted as payment for goods and services.

medium of exchange

What is the MOST important tool of the Federal Reserve?

open market operations

The growth of businesses such as Coinstar, which converts coins into bank notes or gift cards, caused money to _____ the banking system, and the actual money multiplier to _____, ceteris paribus.

reenter; rise

Money is employed as a _____ because it enables people to save the money they earn today and use it to buy goods and services later.

store of value

According to the monetarists

the economy will move to its full employment output level in the long run.