ECO 202 Chapter 15
What is the disadvantage of holding money?
Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.
What do economists mean by the demand for money?
D. It is the amount of money----currency and checking account deposits----that individuals hold.
The Federal Reserve cannot affect real GDP directly; therefore, the Fed typically uses the following as its policy target:
Interest rates
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 AD 2 to AD Subscript 2 comma 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
Which of the following is not one of the monetary policy goals of the Federal Reserve ("the Fed")?
a high foreign exchange rate of the U.S. dollar relative to other currencies
When the Federal Open Market Committee (FOMC) decides to increase the money supply, it _________ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it ________ U.S. Treasury securities.
buys, sells
With an expansionary monetary policy, investment, consumption, and net exports all ________, which results in the aggregate demand curve shifting to the ________, increasing real GDP and the price level.
increase, right
The federal funds rate
is the rate that banks change each other for short-term loans of excess reserves
In the figure to the right, the ________ of holding money __________ when moving from Point A to Point B on the money demand curve.
opportunity cost, decreases
One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal,
the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent
If real GDP increases,
the money demand curve shifts to the right.
Which of these variables are the main monetary policy targets of the Fed?
the money supply and the interest rate
According to an article in the New York Times, an official at the Bank of Japan had the following explanation of why monetary policy was not pulling the country out of recession: "Despite recent major increases in the money supply, he said, the money stays in banks." Source: James Brooke, "Critics Say Koizumi's Economic Medicine Is a Weak Tea," New York Times, February 27, 2002. -In the quote, when the official says "the money stays in banks", he is referring to _________ in the reserves in banks. -But the real problem was that banks were not ________ the reserves. -The reason for this may have been a lack of ________.
-an increase - lending - borrowers
The figure to the right illustrates a dynamic AD-AS model: 1.) 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 AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period? _______________________ . 2.)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:
1. Expansionary monetary policy 2. -increases -does not change -increases -decrease
An article in BusinessWeek in 2013 reported that Fed Chairman Ben Bernanke testified to Congress that: "If we see continued improvement and we have confidence that that is going to be sustained, then we could----in the next few meetings---we could take a step down in our pace of purchases." According to the article, Bernanke also told Congress that "'premature tightening' could 'carry a substantial risk of slowing or ending the economic recovery.'" Source: Nick Summers, "Confusion about the Fed Slowing Its $85 Billion in Monthly Bond Buying Is Roiling the Markets," Bloomberg BusinessWeek, June 10-16, 2013. 1.) The purchases Fed Chairman Bernanke is referring to are 2.) A "premature tightening" of the "pace of purchases" would slow down the economic recovery because this action would be
1.) open market purchases of government securities 2.) contractionary, reducing lending and economic activity.
Consider the following table: Year: Potential GDP: Real GDP: Price Level: 2012 $14.7 Trillion $14.7 Trillion 110 2013 $15.3 Trillion $15.4 Trillion 114 1.)What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? 2.) If the Feds policy is successful, what is the effect on the following indicators? -Actual Real GDP: -Potential Real GDP: -Price Level: -Unemployment:
1.)The Fed will pursue a contractionary monetary policy 2.) -decreases -does not change -decreases -increases
When the Federal Reserve sells bonds as a part of a contractionary monetary policy, there is:
A decrease in the money supply and an increase in the the interest rate
Suppose the economy is initially in long-run equilibrium. The Fed enacts a policy to decrease the required reserve ratio. In the short-run, this expansionary monetary policy will cause:
A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output.
Which of the following statements is correct?
A. A majority of economists support the Fed's choice of the interest rate as its monetary policy target, but some economists believe the Fed should concentrate on the money supply instead. B. Changes in the federal funds rate usually will result in changes in both short-term and long-term interest rates on financial assets. C. The effect of a change in the federal funds rate on long-term interest rates is usually smaller than it is on short-term interest rates. ALL OF THE ABOVE ARE CORRECT
The interest rate that banks charge each other for overnight loans is called the
federal funds rate
During 2005, the FOMC was concerned that the inflation rate would begin to accelerate due to the continued boom in the housing market, so the Fed started decreasing the target for the federal funds rate.
False
Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?
Low Prices
What is the advantage of holding money?
Money can be used to buy goods, services, or financial assets.
Consider the figure to the right. 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
Monetary policy is defined as:
The actions the Federal Reserve takes to manage the money supply and interest rates.
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
The Federal Reserve has multiple economic goals for monetary policy to achieve, However, it can be difficult to manage all of the goals at once. Which of the following is not true regarding the multiple goals of the Fed?
The goal of financial market stability means that the Fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make money.
What are the Fed's main monetary policy targets?
The money supply and interest rates
Explain whether you agree with this argument: If the Fed actually ever carried out a contractionary monetary policy, the price level would fall. Because the price level has not fallen in the United States over an entire year since the 1930s, we can conclude that the Fed has not carried out a contractionary policy since the 1930s.
The statement is false. A contractionary policy could result in a lower rate of inflation rather than a fall in the price level.
When the Fed conducts an open market purchase, the Fed _____________________ and the money supply _______________ .
buys securities from banks, increases
The figure to the right 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 LRAS 06, we would expect the Federal Reserve Bank to pursue a ______________ 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
contractionary decreases does not change decreases increases
When the Fed conducts an open market purchase, the interest rate should
decrease
From an initial longminusrun macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than longminusrun aggregate supply, then the Federal Reserve would most likely
decrease interest rates
The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called
expansionary monetary policy
Consider the following statement: "The Fed has an easy job. Say it wants to increase real GDP by $200 billion. All it has to do is increase the money supply by that amount." The statement is __________ because an increase in the money supply _______ affect real GDP directly.
incorrect, does not
If the economy moves into recession, monetarists argue that the Fed should
keep the money supply growing at a constant rate
When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.
low, high
Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2016 and in 2017 if the Federal Reserve does not use monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2017, which of the following will be lower than if the Fed had taken no action? YEAR: Pot. Real GDP: Real GDP: Price Level: 2016 $18.0 trillion $18.0 Tri 150 2017 $18.5 Trillion $18.8 Tri 154
real GDP and the inflation rate
The _____________________ is considered the most relevant interest rate when conducting monetary policy.
short term nominal interest rate
Congress broadened the Fed's responsibility since
the 1930's as a result of the Great Depression
Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
the fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP
If the price level decreases,
the money demand curve shifts to the left.
When Congress established the Federal Reserve in 1913, its main responsibility was
to make discount loans to banks sufferring from large withdrawals by depositors
If the Fed believes the inflation rate is about to increase, it should
use a contractionary monetary policy to increase the interest rate and shift AD to the left.
If the Fed believes the economic is about to fall into recession it should
use an expansionary monetary policy to lower the interest rate and shift AD to the right.
