ECN315_Final_HW7-12
All else constant, as the interest rate rises
housholds choose to hold less wealth as money.
When faced with a negative shock to long-run aggregate supply, the best course of action for the Fed to achieve both of its goals is to
implement contractionary policy.
A decline in the interest rate would most likely be caused by
a decrease in income
[Quarter, GDP gap, Inflation rate] [Q1 20201.2%2.0%] [Q2 2020-9.9%1.1%] [Q3 2020-3.2%1.6%] Suppose the equilibrium real Federal Funds rate is 2% and the Federal Reserve chooses 2% as the target inflation rate. What is the Federal Funds rate suggested by the Taylor rule in Q2 2020? Answer as a % and round to two decimal places
-2.3
[Year, M2, GDP deflator/100, Real GDP] [1989, 3050, 0.614, 9192] [2019, 14830, 1.123, 19073]
1.44
[Quarter, GDP gap, Inflation rate] [Q1 20201.2%2.0%] [Q2 2020-9.9%1.1%] [Q3 2020-3.2%1.6%] Suppose the equilibrium real Federal Funds rate is 2% and the Federal Reserve chooses 2% as the target inflation rate. What is the Federal Funds rate suggested by the Taylor rule in Q3 2020?
1.8
[Year, M2, GDP deflator/100, Real GDP] [1989, 3050, 0.614, 9192] [2019, 14830, 1.123, 19073]
1.85
Suppose the long-run growth rate of potential GDP is 2.5% percent per year. Suppose the Federal Reserve decides that it would like to keep inflation at 0% per year and adopts a fixed money growth rate rule. What growth rate should it choose? Enter as percent and do not enter a % sign.
2.5
Suppose the equilibrium real Federal Funds rate is 2% and the Federal Reserve chooses 2% as the target inflation rate. If the GDP gap and inflation gap are both zero, the Federal Funds rate target suggested by the Taylor rule is _____. Answer a percent and do not enter a '%' sign.
4
[Quarter, GDP gap, Inflation rate] [Q1 20201.2%2.0%] [Q2 2020-9.9%1.1%] [Q3 2020-3.2%1.6%] Suppose the equilibrium real Federal Funds rate is 2% and the Federal Reserve chooses 2% as the target inflation rate. What is the Federal Funds rate suggested by the Taylor rule in Q1 2020? Answer as a % and round to two decimal places
4.6
Suppose the equilibrium real Federal Funds rate is 2% and the Federal Reserve chooses 2% as the target inflation rate. Suppose the GDP gap is -1.5% and the inflation gap is 1%. The Federal Funds rate target suggested by the Taylor rule is _____. Answer a percent, round to two decimal places and do not enter a '%' sign. Hint: The actual inflation rate is the target rate plus the gap.
4.75
Who at the Federal Reserve makes the decisions regarding the direction of monetary policy?
A committee made up of the Federal Reserve Board of Governors and a (rotating) subset of Federal Reserve District Bank presidents.
Which of the following is true about Collateralized Debt Obligations (CDOs)? [CDOs were constructed to generate higher bond ratings compared to conventional mortgage-backed securities (MBS)., Misestimation of default correlations of mortgages acting as collateral in CDOs significantly altered expected values., CDOs differ from conventional pass-through mortgage-backed securities (MBS) in that payouts are prioritized so that senior holders get paid first.]
All of these
Which of the following is a liability of the Federal Reserve?
Bank reserves
Which of the following a consequence of the dual banking system?
Banking regulations are complicated with multiple regulatory agencies.
Why did the quantitative easing effort of the Federal Reserve fail to generate high inflation rates?
Banks did not significantly increase lending.
Among other things, what do the Basel Accords require of banks?
Banks maintain a minimum risk-weighted leverage ratio.
What reduces the independence of the central bank?
Congress can amend the Federal Reserve act.
Incumbent politicians (those up for re-election) generally prefer
Expansionary monetary policy .
What do the government-sponsored enterprises Fannie Mae and Freddie Mac do and why?
Fannie Mae and Freddie Mac purchase home mortgages in order to make the mortgage market liquid and interest rates on mortgages low.
Which of the following is an asset of the Federal Reserve?
Loans to banks
Money market mutual funds sell shares to investors for $1 each. Savers view Money market deposits as a substitute for savings accounts. What is different about Money Market deposits?
Money market deposits are not insured by the FDIC.
Banks would probably take fewer risks if depositors, lenders, potential shareholders, and borrowers were aware of their activities. However, deposit insurance and the costly acquisition of information reduce the incentive for research. How would you regulate banks to solve this problem?
Require banks provide information regarding lending activities to the public.
Bank regulation specifies that the leverage ratio (capital/assets) cannot fall below 5%. However, Some assets are riskier than others, and the bank may engage in risky off-balance sheet activities. What kinds of bank regulation would you recommend to account for assets with different levels of risk and off-balance sheet activities?
Require banks that hold riskier assets hold more capital.
The business of banking may attract speculators and other shady characters looking to make risky investments with depositors funds (adverse selection). What type of banking regulation would help solve this problem?
Require individuals receive permission (charter) from the state or Federal Government to start a bank.
The safety net provided by the government in the form of deposit insurance and implicit bailout guarantee encourages banker managers and owners to take on excessive risk. What kinds of regulations would you recommend to curb excessive risk-taking?
Restrict banks on the types of assets they hold.
Which entity charters and supervises national banks?
The Comptroller of the Currency
State banks are chartered and supervised by states. Which national entity(ies) supervises state-chartered banks?
The FDIC or the Federal Reserve
Which of the following is true? [The Fed can choose the policy instruments to use to implement policy but does not have goal independence. The Federal Reserve is mandated in the type of instruments to use but can choose how to interpret its mandate. The Fed can choose the policy instruments to implement policy and how to interpret its mandate. Congress has mandated the Fed set a 2% inflation target.]
The Fed can choose the policy instruments to implement policy and how to interpret its mandate.
Suppose the Fed wanted to decrease the money supply be decreasing the money multiplier. Which tool could be used to accomplish this?
The Fed could increase the reserve requirement.
How does the Federal Reserve pay for securities it purchases from a dealer bank as part of an open market purchase of securities?
The Fed creates electronic funds from nothing and adds them to the reserve account of the dealer bank.
Refer to your answer to the Taylor rule suggestion for the Federal Funds rate in Q2 2020. Which of the following is correct?
The Taylor rule suggests the Fed should implement unconventional policy tools.
What is the advantage of an independent central bank?
The central bank is less likely to engage in inflationary monetary policy and the request of politicians.
What is true about the ownership of Fannie Mae and Freddie Mac?
The companies used to be privately owned. Since the financial crisis, they have been controlled by the government.
Which statement is most likely attributed to a economist of the Keynesian perspective?
The fiscal policy response to the Great Depression was not aggressive enough.
Money market mutual funds sell shares to investors for $1 each. Savers view Money market deposits as a substitute for savings accounts. What is done with the funds from savers?
The funds are used to purchase short-term securities, like Treasury securities and commercial paper.
.The Federal Funds rate is
The interest rate banks pay/collect to borrow/lend overnight in the inter-bank market
Suppose real GDP declines. If this was caused by [ Select ] ["a permanent shock to aggregate supply", "a temporary shock to aggregate supply", "a shock to aggregate demand"] then the Fed should implement contractionary policy. If this was caused by [ Select ] ["a temporary shock to aggregate supply", "a shock to aggregate demand", "a permanent shock to aggregate supply"] then the Fed should implement expansionary policy. If this was caused by [ Select ] ["a permanent shock to aggregate supply", "a shock to aggregate demand", "a temporary shock to aggregate supply"] then the Fed should not respond and wait for the economy to adjust on its own.
[a permanent shock to aggregate supply, a shock to aggregate demand, a temporary shock to aggregate supply]
In the long-run, an increase in the money supply leads to [ Select ] ["a decrease", "an increase", "no change"] in the real interest rate and [ Select ] ["a decrease", "no change", "an increase"] in the nominal interest rate. In the short-run, an increase in the money supply leads to [ Select ] ["an increase", "a decrease", "no change"] in the real interest rate and most likely [ Select ] ["an increase", "a decrease", "no change"] in the nominal interest rate.
[no change, increase, decrease, decrease]
Which of the following is NOT considered money in the United States today?
a Treasury security
An increase in money demand could be caused by
all of these
When faced with a negative, temporary shock to short-run aggregate supply, the Fed can achieve both of its goals by
allowing the economy to adjust on its own.
Prior to the financial crisis of 2007-2009,
borrowers rarely defaulted on mortgages.
When faced with a negative shock to aggregate demand, the Fed
can achieve both its goals by implementing expansionary monetary policy.
How do central banks implement negative interest rates?
charge banks for holding reserves
If wealth suddenly declines
consumption decreases.
Should the Federal Reserve wish to reduce the inflation rate it should [ Select ] ["decrease", "increase", "hold steady"] the money growth rate. All else constant, this would cause [ Select ] ["a decrease", "an increase", "no change in"] in interest rates in the short-run.
decrease, increase
The Federal Reserve recently reduced the required reserve ratio. The market for reserve predicts reserve [ Select ] ["demand", "supply"] [ Select ] ["decreases", "increases"] and the Federal funds rate decreases .
demand, decreases, decreases
The Federal Reserve sets policy by
discretion
Lulu withdraws $100 cash from her deposit account at Mid First bank (Assume Mid First had the funds in excess reserve). The immediate result is M1 and M2 _ .
does not change/does not change
n the long-run, the expected price level (inflation) is [ ] than the actual price level (inflation).
equal
In the long-run, inflation is caused by
growth in the money supply greater than growth in real GDP.
All else constant a decrease in interest rates causes consumption to increase , investment to increase , government purchases to [ Select ] ["remain unchanged", "decrease", "increase"] , and net exports to [ Select ] ["remain unchanged", "decrease", "increase"] .
increase, increase, remain unchanged
According to the Fisher effect, an increase in the expected inflation rate leads to [ ] in the nominal interest rate and [ ] in the real interest rate.
increase, no change
Sally purchases a share of Microsoft stock from Joel. Sally pays with a transfer from her money market account into Joel's checking account. As a result M1 and M2 _ .
increases/does not change
The Federal Reserve can increase aggregate demand by
increasing the money supply and reducing the interest rate.
If a central bank yields to political pressure,
inflation rates are generally higher.
The FDIC
insures consumer deposits up to a certain limit
Fiat currency
is money that would otherwise be valueless, but has value by law., can be created by governments in unlimited amounts, is the current currency regime of developed nations.
In response to an expansion of the money supply, interest rates may initially fall. This describes the
liquidity effect
To increase the borrowed part of the monetary base, the Fed should
make loans to banks.
Economists of the non-activist school of thought think that
most recessions are caused by shocks to aggregate supply.
Of the following unconventional tools, which of the following was not implemented by the Federal Reserve during and after the financial crisis of 2008?
negative interest rates
Is bitcoin considered money in the United States? Select the correct answer and explanation.
no, goods and services are not priced in money and it is not legal tender.
During the Great Depression, households increased the fraction of deposits held as currency and the money multiplier decreased. Assume the monetary base and inflation expectations do not change. The liquidity preference (money supply/demand) model predicts
nominal interest rates increase
The free banking era in the United States, the period between 1832 and 1864, refers to the period of time when
only states chartered banks.
The most common tool of monetary policy during "normal" times is
open market operations
The classical economists believed that if the quantity of money doubled
prices would double
If the Fed wished to reduce the monetary base it should Correct!
sell securities to dealer banks.
The Federal Reserve is mandated to care about
stable inflation and stable output equally.
The Federal Reserve has recently expanded its purchases of securities. The market for reserves predicts reserve [ Select ] ["supply", "demand"] [ Select ] ["increases", "decreases"] and the Federal Funds rate [ Select ] ["decreases", "increases"]
supply, increase, decrease
Suppose the economy begins in long-run equilibrium and experiences a positive shock to aggregate demand. To achieve both of it's goals, the Fed should
take steps to increase interest rates.
Economists of the Keynesian (activist) school of thought think that
the automatic adjustment to long-run equilibrium happens very slowly.
In the market for reserves, the ceiling on the Federal Funds rate is determined by
the discount rate (the interest rate the Fed charges on loans to banks)
The dual banking system in the United States refers to
the existence of banks that are chartered at the state level or national level.
The Federal Funds Rate is
the interest rate banks pay/charge to borrow/lend in the overnight market.
In the market for reserves, the floor on the Federal Funds rate is determined by
the interest rate that the Federal Reserve pays on on reserves.
The FDIC will take steps to close a bank if
the leverage ratio gets too low
When the Federal Reserve conducts an open market purchase of securities,
the monetary base increases.
Shadow banking entities are different that commercial banks in that
their short-term liabilities are not insured by the FDIC.
Over short periods of time,
there is no predictable relationship between money growth and inflation.
Prior to the creation of the Federal Reserve,
there were two previous central banks. These banks closed and there were stretches of time when the U.S. had no central bank.
In the short-run, the quantity of output supplied increases as price level (inflation) increases because
wages and input prices are assumed to be fixed in the short-run.
