Chp. 13 HW Questions

The core ingredients of expansionary monetary policy are shown below. These events impact the real economy and occur as shown by the sequence on the right. (1--> 2--->3---->4) For each of the events described​ below, insert the number ​(1−​4) to give each event its correct position in the sequence. Long term interest rates fall Labor demand shifts right Demand for goods and services increases Short term interest rates fall and access to credit expands

1. Short term interest rates fall and access to credit expands 2. Long term interest rates fall 3. Demand for goods and services increases 4. Labor demand shifts right

Suppose the Fed wants to implement an ​anti-recession monetary policy. For each of the tools listed​ below, indicate the direction the​ Fed's action should take. 1. The Fed should conduct an open market______ of Treasury bonds. 2. The Fed should _________ the reserve requirement. 3. The Fed should _______ the interest paid on reserves deposited at the Fed. 4. The Fed should ________ lending from its discount window.

1. purchase 2. lower 3. decrease 4. expand

Briefly explain how an increase in the quantity of reserves that commercial banks hold at the Federal Reserve could lead to inflation. A. 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. B. An increase in the reserves that commercial banks hold at the Federal Reserve enables the central bank to increase its bond purchases from​ investors, giving the bond sellers more discretionary income. The higher incomes fuel more spending on goods and​ services, forcing the price level higher. C. An increase in reserves triggers a multiple expansion of bank loans and​ deposits, which generates an increase in asset prices​ and, as a​ consequence, rapid growth in private spending. If spending grows faster than real​ GDP, inflation will occur. D. An increase in reserves enables the central bank to increase the amount of money in​ circulation, and with more money in​ circulation, inflation becomes inevitable.

A. 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.

What could explain why a decrease in taxes could lead to a​ less-than-proportionate increase in​ output? A. Consumers may choose to save much of the tax cut in anticipation of having to pay higher taxes in the future. B. As a result of diminishing returns to current​ consumption, consumers may choose to spread the extra spending over the long term rather than consuming the proceeds of a tax cut all at once. C. A decrease in taxes will necessitate lower government​ outlays, thus largely offsetting the higher consumption expenditures of households. D. All of the above. E. A and B only.

A. Consumers may choose to save much of the tax cut in anticipation of having to pay higher taxes in the future. B. As a result of diminishing returns to current consumption, consumers may choose to spread the extra spending over the long term rather than consuming the proceeds of a tax cut all at once. (A and B only)

When nominal interest rates have hit the zero lower​ bound, can central banks use interest rates to stimulate the​ economy? Explain. A. ​Yes, since the zero lower bound applies to nominal​ rates, not real​ rates, and it is real rates that are relevant for investment decisions. B. ​No, once the zero lower bound is​ hit, central banks can no longer employ interest rates to stimulate economic activity. C. ​Yes, but the mechanism by which central banks manipulate the interest rates that matter for spending must deviate from the​ banks' traditional method. D. Both A and C are correct.

A. Yes, since the zero lower bound applies to nominal rates, not real rates, and it is real rates that are relevant for investment decisions. C. Yes, but the mechanism by which central banks manipulate the interest rates that matter for spending must deviate from the banks' traditional method. (Both A and C are correct)

Does the effectiveness of monetary policy depend on inflation​ expectations? Explain. A. ​Yes, the central​ bank's ability to influence the​ long-term expected real interest rate is partly determined by the​ public's long-term expectations of the inflation rate. B. ​Yes, long-term inflation expectations can interfere with the central​ bank's control over the​ short-term nominal interest rate. C. ​No, inflation expectations do not affect nominal interest​ rates, and these are the rates monetary policy directly impacts. D. ​No, the effectiveness of monetary policy is solely determined by the supply of reserves from the central bank and the demand for reserves from private banks.

A. Yes, the central bank's ability to influence the long-term expected real interest rate is partly determined by the public's long term expectations of the inflation rate.

Other than open market​ operations, what tools does the Federal Reserve use to manipulate interest rates in the​ economy? ​(Check all that apply​.) A. Changing the reserve requirement. B. Lending from the discount window. C. Changing the interest rate paid on reserves deposited at the Fed. D. Changing the magnitude of federal transfer payments. E. Quantitative easing.

A. changing the reserve requirement B. lending from the discount window C. changing the interest rate paid on reserves deposited at the Fed. E. Quantitative easing

The purpose of countercyclical policy is to​ ____________. A. reduce the intensity of economic fluctuations. B. promote greater equity in the distribution of income. C. smooth the growth rates of​ employment, GDP, and prices. D. all of the above. E. A and C are correct.

A. reduce the intensity of economic fluctations C. smooth the growth rates of employment, GDP, and prices. (A and C are correct.)

Suppose the Fed wants to raise the federal funds rate. Which of the following are available mechanisms that the Fed can use to achieve this​ goal? ​(Check all that apply​.) A. Decrease the volume of quantitative easing. B. Increase the interest rate paid on reserves deposited at the Fed. C. Increase corporate taxes. D. Decrease lending from the discount window. E. Increase the reserve requirement.

B. increase the interest rate paid on reserves deposited at the Fed. D. decrease lending from the discount window E. increase the reserve requirement

Contractionary monetary policy shifts the labor demand curve to the left by​ ____________. A. pushing​ long-term interest rates down, thereby causing reduced private expenditures and inducing firms to want to hire fewer workers. B. pushing​ long-term interest rates up, thereby causing reduced private expenditures and inducing firms to want to hire fewer workers. C. decreasing ​households' after-tax​ income, thereby causing reduced private expenditures and inducing firms to want to hire fewer workers. D. decreasing the private​ sector's expectation of​ inflation, causing private expenditures to be postponed ​(as people wait for the lower future​ prices) and inducing firms to want to hire fewer workers.

B. pushing long term interest rates up, thereby causing reduced private expenditures and inducing firms to want to hire fewer workers.

Countercyclical policy that seeks to reduce GDP growth and the level of employment is appropriate when​ ____________. A. the nation has an international trade deficit. B. the economy is experiencing inflation. C. excessively optimistic sentiments about the economy are prevalent. D. all of the above. E. B and C are correct.

B. the economy is experiencing inflation C. excessively optimistic sentiments about the economy are prevalent. (B and C are correct)

How can expansionary​ expenditure-based fiscal policy lead to crowding out in the​ economy? A. ​Expenditure-based fiscal policy raises inflation expectations and interest​ rates, causing private sector expenditures to fall. B. ​Expenditure-based fiscal policy increases the national​ debt, inducing​ forward-looking households and firms to reduce expenditures in anticipation of having to pay higher future taxes. C. ​Expenditure-based fiscal policy leads to more government​ borrowing, absorbing funds that would have otherwise been borrowed and expended by the private sector. D. ​Expenditure-based fiscal policy requires the collection of additional​ taxes, which reduce household incomes and expenditures.

C. Expenditure-based fiscal policy leads to more government borrowing, absorbing funds that would have otherwise been borrowed and expended by the private sector.

Which of the following statements is an explanation as to why the government expenditure multiplier might be smaller than 1​ (and even​ 0): A. Government spending​ "crowds out" private spending by raising real interest rates which shifts labor demand to the right. B. Government spending is most likely to​ "crowd out" private spending when the economy is in a deep recession. C. Government spending​ "crowds out" private spending by raising real interest rates. D. Government spending necessarily displaces private spending​ dollar-for-dollar according to the national income accounting identity.

C. Government spending "crowds out" private spending by raising real interest rates.

What are the similarities between monetary and fiscal policies? (check all that apply) A.The manner (or ways) in which they work B.The entities (or authorities) that oversee them C.The aspect of the labor market they impact D.The result their implementation seeks to achieve.

C. The aspect of the labor market they impact D. The result their implementation seeks to achieve.

What are the differences between monetary and fiscal policies?(Check all that apply) A. The aspect of the labor market they impact B. The result their implementation seeks to achieve. C. The manner (or ways) in which they work D. The entities (or authorities) that oversee them

C. The manner (or ways) in which they work D.The entities (or authorities) that oversee them

How do expansionary policies differ from contractionary​ policies? A. Expansionary policies seek to reduce the severity of​ recessions, while contractionary policies seek to slow down the economy when it grows too fast. B. Expansionary policies seek to shift the labor demand curve to the​ right, while contractionary policies seek to shift it to the left. C. Expansionary policies seek to increase economic growth and increase​ employment, while contractionary policies seek to reduce the risk of excessive price inflation. D. All of the above. E. Only A and C are correct.

D. ALL OF THE ABOVE

How does the zero lower bound on interest rates affect the working of monetary​ policy? A. It reduces the effectiveness of monetary policy by impairing the ability of the public​ (including investors) to understand the central​ bank's actions and signals. B. 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. C. It makes the implementation of expansionary monetary policy more difficult since it effectively blocks the central​ bank's use of its primary tool. D. All of the above. E. A and C only.

D. all of the above

When wages exhibit downward flexibility and a recession​ occurs, the decline in employment will be​ ____________. A. smaller than what would occur if wages were rigid B. smaller when the supply of labor is relatively inelastic C. softened because some of the decline in labor demand is absorbed by a fall in wages. D. all of the above. E. A and C only.

D. all of the above

What are the automatic and discretionary components of fiscal​ policy? A. The automatic components are limited to government​ expenditures, while the discretionary components entail changes in both taxes and expenditures. B. The automatic components stimulate the​ economy, while the discretionary components serve purposes unrelated to the health of the overall economy. C. The automatic components are those fiscal actions that require accommodation from monetary​ policy, while the discretionary components do not. D. The automatic components do not require deliberate action on the part of the​ government, while the discretionary components do.

D. the automatic components do not requires deliberate action on the part of the government, while the discretionary components do.

T or F of Countercyclical Fiscal Policy? Expansionary fiscal policy uses lower government expenditure to increase the growth rate of real GDP

FALSE

T or F of Countercyclical Fiscal Policy? It is conducted by the Federal Reserve System.

FALSE

M or F? The TARP program was a congressionally authorized outlay by the U.S. Treasury.

Fiscal

M or F? Transfer-like expenditures were made to non-financial companies.

Fiscal

M or F? U.S. Treasury officials participated in the development of the TARP program.

Fiscal

M or F? The TARP program infused banks with capital.

Monetary

Monetary or Fiscal? Federal Reserve officials participated in the development of the TARP program.

Monetary

T or F of Countercyclical Fiscal Policy? Contractionary fiscal policy uses lower government expenditure to decrease the growth rate of real GDP.

TRUE

T or F of Countercyclical Fiscal Policy? It uses changes in government expenditure and taxes to increase the growth rate of GDP.

TRUE

The government expenditure​ multiplier: Permits us to calculate how much real _______ _______ for each​ $1 increase in government spending. Might be larger than 1 because increased government spending also _____________ ​take-home pay, household​ consumption, and business investment spending. Reflects how much an increase in government spending shifts labor demand to the ________.

real GDP rises increases right

The Troubled Asset Relief Program​ (TARP) is considered to be an example of a countercyclical policy that represents a mix of fiscal and monetary effects because it​ ____________. A. gave the government ownership rights in selected private banks. B. provided public monies to​ private, non-financial business enterprises. C. was formulated and undertaken jointly by Fed and Treasury officials. D. was a congressionally authorized expenditure by the U.S. Treasury that​ sought, in​ part, to provide financial resources to elements of the banking system.

was a congressionally authorized expenditure by the US treasury that sought, in part, to provide financial resources to elements of the banking system (D).