Econ Chapters 16-17
Use the graph to the right to answer the following questions: a. If the Fed does not take any policy action, in 2021 the level of real GDP will be $ ______ trillion (enter your response to one decimal place) and the price level will be ______ (enter your response as an integer).
18.5 trillion 124
If the Fed takes no policy action, the inflation rate in 2021 will be _____ % (enter your response as a percentage rounded to one decimal place). If the Fed uses monetary policy to keep real GDP at its full-employment level, the inflation rate in 2021 will be ______% (enter your response as a percentage rounded to one decimal place).
3.3 1.7
In a fractional reserve banking system, what is the difference between a "bank run" and a "bank panic?"
A bank run involves one bank; a bank panic involves many banks.
If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators?
Actual real GDP: increases Potential real GDP: does not change Price level: increases Unemployment: decreases
In the figure to the right, the economy experiences inflation in the second period. What would be the Fed's reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS 2?
All of the above
While serving as the president of the Federal Reserve Bank of St. Louis, William Poole stated, "Although my own preference is for zero inflation properly managed, I believe that a central bank consensus on some other numerical goal of reasonably low inflation is more important than the exact number." Source: William Poole,"Understanding the Fed," Federal Reserve Bank of St. Louis Review, Vol. 89, No. 1, January/February 2007, p. 4. Which of the following are benefits that the economy might gain from an explicit inflation target LOADING... even if the target chosen is not a zero rate of inflation?
All of the above
Which of the following is not a function of money?
Commodity.
The figure to the right illustrates a dynamic AD-AS model LOADING.... 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?
Expansionary monetary policy
Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.
False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.
Which of the following best explains the difference between commodity money and fiat money?
Fiat money has no value except as money, whereas commodity money has value independent of its use as money.
What do economists mean by the demand for money?
It is the amount of money-currency and checking account deposits- that individuals hold.
Why would a cut in the Selic rate be an appropriate policy action at a time when the inflation rate was falling and the economy was struggling?
Lowering the Selic rate would decrease other interest rates, which would increase aggregate demand and stimulate the economy.
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1 LOADING...? Ignore any actions the bank may take as a result of your having withdrawn the $100.
M1 remains unchanged.
What is the advantage of holding money?
Money can be used to buy goods, services, or financial assets.
The fiscal deficit of the country Zoldova has been increasing at an alarming rate for the last decade. One of the major reasons for the worsening fiscal deficit has been indiscriminate government spending which had to be financed by printing more currency. The continuous increase in money supply to finance wasteful government expenditure caused the inflation rate to hit triple digits. With rising instability in the country, the central bank had to redenominate its currency earlier this year. As a result, currency worth 10,000 Zoldovan dollars last year are now worth only 100 Zoldovan dollars. In spite of these efforts, the value of the currency kept falling. The governor of the Zoldovan central bank, Martin Ntini, is of the opinion that the growth of money supply needs to be curbed because printing money was the source of the problem. However, even after restricting money supply growth, they were unable to prevent the value of the currency from falling further. Which of the following, if true, can explain this outcome?
People in Zoldova started using the U.S. dollar for transactions and were unwilling to switch back to the domestic currency.
Which one of the following is not one of the monetary policy goals of the Fed?
Reduce income inequality.
Hermesia, a developed economy, has been experiencing low growth in output with a high rate of unemployment for more than a year. Two members of the National Trade Union in Hermesia, Geoffrey Miller and Arthur Davis, are discussing the relevant expansionary policies that can be taken by the central bank or the government to stimulate economic growth in Hermesia. Geoffrey suggests that the central bank should substantially lower the reserve requirements of the commercial banks so that money supply and household spending both increase. Arthur, however, disagrees. According to him, a decrease in the reserve requirements will not have the desired impact on money supply. He believes that an increase in government spending is more likely to boost the economy than an expansionary monetary policy. Which of the following, if true, will weaken Arthur's claim that a decrease in the reserve requirements will not substantially increase money supply?
The central bank of Hermesia has recently reduced the interest rate on excess reserves to zero.
An article in the Wall Street Journal in 2017 discussed the decision by Brazil's central bank to cut the Selic rate, which is the equivalent in Brazil of the federal funds rate in the United States. According to the article, the cut occurred "as the country's inflation rate continues to fall quickly and the economy still struggles." Source: Jeffrey T. Lewis, "Brazil Cuts Its Benchmark Rate a Full Percentage Point," Wall Street Journal, April 12, 2017. In what sense do you think the Brazilian economy was "struggling" when this article was published?
The cut in the Selic rate suggests that Brazilian real GDP was below its potential.
The government of West Tarragon declared the lowest unit of its currency to be redundant from the next quarter. The polka, which is the lowest denomination of the currency in West Tarragon, is a copper coin that has been in circulation for the last 40 years. The government justified its decision by saying that the purchasing power of the polka has dwindled substantially over time. Jenny Merchant, a journalist, claims that this move will adversely affect the average consumer by pushing up the price level. Which of the following, if true, will support the government's decision to take the polka out of circulation?
The face value of the coin is much lower than the intrinsic value of the coin.
Inflation in the developing country of Terbia has been rising over the last few years and is currently at a very high level. Two stock market analysts, Stanley Durro and Michelle Thompson, are discussing the possible causes of inflation. Michelle thinks that the real reason why prices are rising is because Terbia's economy is expanding. Stanley disagrees. He argues that the inflation is not demand driven; on the contrary, too much money in the economy is increasing the price level. Which of the following, if true, would strengthen Michelle's argument?
The growth rate of per capita income in Terbia has been higher than the population growth rate for the last five years.
If the Fed wants to keep real GDP at its potential level in 2021, it should use a ______ policy. This means that the trading desk should be ______ Treasury bills.
a contractionary selling
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to
buy U.S. Treasury securities from the public.
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
In an interview, Paul Volcker, Chairman of the Federal Reserve's Board of Governors from 1979 to 1987, was asked about the Fed's use of monetary policy to reduce the rate of inflation. Volcker replied: The Federal Reserve had been attempting to deal with ... inflation for some time. ... By the time I became chairman ... we adopted an approach of ... saying, We'll take the emphasis off of interest rates and put the emphasis on the growth in the money supply, which is at the root cause of inflation ... we will stop the money supply from increasing as rapidly as it was ... and interest rates went up a lot. ...We said ... we'll take whatever consequences that means for the interest rate because that will enable us to get inflation under control. Source: "Paul Volcker Interview," http://www.pbs.org/fmc/interviews/volcker.htm. While Paul Volcker was chairman, the Fed did not target both the rate of inflation and interest rates because
if the Fed targets interest rates, they have to accept that inflation will fluctuate significantly, and Volker's goal was to reduce inflation.
Following the financial crisis of 2007-2009, Congress passed the Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act. The act increased regulation of the banking system, and from 2010 to 2016, regulators approved only five new banks, which was not enough to offset the closure of existing banks. According to the article, "Community bankers say the decline in the number of banks has led to fewer lending options for startups and small businesses." Source: Rachel Witkowski, "Banks Are Finally Sprouting Anew in America," Wall Street Journal, February 8, 2017. Startups and small businesses might be more likely than large corporations to rely on banks for funding because
large corporations have more ways to obtain funding than do startups and small businesses.
Why is the Fed sometimes said to have a "dual mandate"? The Fed is said to have a" dual mandate" because
maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946.
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.
By raising the discount rate, the Fed leads banks to make _________ loans to households and firms, which will _________ checking account deposits and the money supply.
fewer; decrease