Exam 3

wage-price spiral

The process by which changes in wages and prices cause further changes in wages and prices.

Banks are required by law to keep a fraction of their deposits as

reserves

The States and Balanced Budgets. The accompanying figure shows the initial aggregate demand and aggregate supply curves for the U.S. Suppose the national economy experiences a recession. 10.2

AD shift left (down)

In​ 2000, the Chinese government mandated three​ one-week holidays throughout the year to stimulate consumer spending. The idea was that these extended vacations would induce the Chinese to spend more of their earnings while on vacation. = inc C

AD shift right: New equilibrium where AD2 and AS1 meet

The US Housing and Urban Development (HUD) Moving to Opportunity Experiment demonstrated that 28_part 2_place_based_policies_fiscal Lecture Video Quiz

Adults in poverty did not benefit economically from moving into more affluent neighborhoods, but their children did

Economists say that supply shocks create a dilemma for the Federal Reserve that shocks to demand​ (for example, from sudden increases in investment spending by optimistic​ firms) do not create. Which of the following best explains why economists say​ this?

Because the Fed can only lower unemployment due to a supply shock by increasing the price level. Reducing unemployment by increasing the money supply will further increase the price level.

The Federal Open Market Committee​ (FOMC) is a​ 12-person board consisting of the seven members of the _____, the president of the Federal Reserve Bank of ______, and the presidents of four of the other ______ regional Federal Reserve Banks on a rotating basis.​ (The seven nonvoting bank presidents attend the meetings and offer their​ opinions.) The chairperson of the FOMC is the chairperson of the _____. The FOMC is assisted by vast teams of professionals at the Board of Governors and at the regional Federal Reserve Banks.

Board of Governors; New York; 11; Board of Governors

AD increases if 10.1

C, I, G increase (NX?)

Economic Policy and the Housing Industry. Advocates for the housing industry​ (an industry very sensitive to interest​ rates) might want to advocate lower government spending for the long term. Which of the following would explain why a decrease in government spending would be desirable for the housing industry in the long​ run?

Decreases in government spending can reduce interest rates and crowd in investment.

Monet demand will _____ as the price level falls

decrease

largest component of federal revenue.

individual taxes

ong-run neutrality of money

A change in the supply of money has no effect on real interest rates, investment, or output in the long run.

The official US poverty line is combined pre-tax/subsidy family (household) income of less than approximately ________ per year 28_part 1_place_based_policies_monetary - Lecture VideoQuiz

$25,000

Cash Withdrawals and Changes in the Money Supply. If a customer withdrew $1,000 in cash from a bank and the reserve ratio was 0.4​, by how much could the supply of money eventually be​ reduced?

$2500 initial deposit• (1/reserve ratio) 1000/.4 = 2500

If the reserve ratio is 0.10 and a deposit of $100 is placed into a​ bank, that bank can lend out $_____

$90 100•(1-reserve ratio) or 100-(100•reserve ratio)

If the multiplier for taxes is −1.20 and taxes are increased by ​$150 ​billion, calculate the amount by which the demand curve will ultimately shift. Shift of the demand curve​ = ​$ ____ Billion 10.1

-180 billion tax multiplier= ΔY/ΔT. -> ΔT•tax multiplier=ΔY -> -1.2x150

Every time someone makes a deposit in a bank, that individual bank makes a loan in the amount of the initial deposit times 20_ch13_slides2_balance sheets_Lecture Video/Quiz

1 minus the reserve ratio

money multiplier

1/ reserve ratio

To help ensure political​ independence, each member of the Board of Governors is appointed to _____ year terms

14

If the required reserve ratio is 0.25​, and there is an increase in cash deposits of $6,000​, there would be a total increase in checking account balances of $___

24000 increase in checking account balances= money multiplier= initial deposit/reserve ratio 6000/.25 = 24000

The President of the New York Federal Reserve Bank. Which of the following is a reason that the president of the New York Federal Reserve Bank is always a voting member of the Federal Open Market​ Committee? A. NY is the​ world's financial center. B. NY is a major economic power of the U.S. C. The FRB of NY conducts monetary policy. D. All of the above.

All of the above

What conclusions can we draw when it comes to money​ demand?

An increase in prices or an increase in real GDP will increase money demand.

The Paycheck Protection Program (PPP) 102_CARES Act as of August 3 - Lecture Video Quiz

Forgave the bank loans of qualified small business that used the loan money to keep their employees during the pandemic

It's important that counter-cyclical fiscal policy counter shocks to AD rather than shocks to AS because 15_Ch10_stabilization_slide3 Lecture Video/Quiz

If LRAS is falling then an increase in AD will just cause inflation, crowding out, and hurt the trade balance during a downturn

Fiscal Multiplier and Thrifty Consumers. Suppose that the government gave each U.S. legal resident​ $10 but everyone decided to save the money and not spend it. In this​ case, the fiscal multiplier would be 10.1

It would be​ zero, because with no additional spending there would be no economic activity.

Bitcoin and the Demand for Money. Suppose that Bitcoin became very popular for large transactions. How would this affect the demand for​ money? How about the demand for​ $100 bills?

It would reduce the demand for money and reduce the demand for​ $100 bills. If Bitcoin became very popular for large​ transactions, it would reduce the demand for money since Bitcoin would be viewed as an alternative to money. It would also reduce the demand for​ $100 bills, which are extensively used in large transactions.

payments for Lawsuits at Banks. In​ 2014, a major bank paid the government​ $13 billion to settle a lawsuit. This payment immediately _____ assets, _____ liabilities, and _____ owner's equity

Pearson said: had no effect on; had no effect on; decreased greg said: Assets decreased (cuz bank wrote check to gov for 13 bil) , liabilities were unchanged, owner's equity decreased The payment only reduced​ owners' equity immediately. owners equity decrease by $13 billion because bank net worth decreased by $13 billion

Reducing the​ Fed's Balance Sheet by Selling​ Mortgage-Backed Securities. Suppose the Fed wanted to reduce its balance sheet and decided to sell its​ mortgage-backed securities instead of its holdings of government bonds. What types of interest rates would you expect to​ increase?

Mortgage​ rates, that​ is, interest rates on loans to buy homes would be expected to increase. interest rates inverse w price If the Fed wanted to reduce its balance sheet and decided to sell its​ mortgage-backed securities instead of its holdings of government​ bonds, it would reinvest the proceeds of its​ mortgage-backed securities when they mature and redeem them for cash. This would result in an increase in mortgage​ rates, that​ is, interest rates on loans to buy homes.

Which of the following is NOT a key function of the Federal​ Reserve? A. providing a system of check collection and clearing B. printing currency C. conducting monetary policy D. holding reserves from banks and other depository institutions

NOT a key function of the Federal​ Reserve: printing currency The Fed provides a system of check collection and clearing. The Fed holds reserves from banks and other depository institutions and regulates banks. The Fed conducts monetary policy.

raise taxes to pay for entitlements prob

The problem is that the level of entitlements as a fraction of GDP is predicted to rise so high that raising taxes would dramatically increase the tax burden on the economy and impede economic growth.

Which of the following statements regarding the major tax cut that Donald Trump signed into law in December 2017 is​ true? 10.3

The tax law was designed primarily to stimulate growth in the economy and to fix a dysfunctional international tax system. In December​ 2017, President Donald Trump signed into law a major tax cut. The tax law was designed primarily to stimulate growth in the economy and to fix a dysfunctional international tax system. This legislation cut the corporate tax rate from 35 to 22​ percent, provided an additional deduction for noncorporate​ businesses, reduced individual tax rates for five​ years, and made important changes to the international tax system. At the time of the tax​ cut, the unemployment rate was 4.1​ percent, near full employment. The Congressional Budget Office predicted that the tax cut and prior spending policies enacted in recent years would raise the level of debt held by the public from 77.5 percent of GDP to nearly 97.5 percent by 2027. This led some economists to worry that GDP could exceed full employment and potentially risk higher inflation.

Which of the following would be associated with an increase in the price of stocks?

There is a decrease in risk

Which principle suggests that the demand for money should increase as prices​ increase? A. The principle of liquidity. B. The ceteris paribus principle. C. The​ real-nominal principle. D. The principle of opportunity costs.

The​ real-nominal principle.

An ATM Next to Your Apartment Building. Suppose an ATM connected to your own bank is installed right next to your apartment building. a. How will this affect the average amount of currency you carry around with​ you? b. If you withdraw funds at your ATM only from your checking​ account, will your action have any effect on total money​ demand?

You will carry less currency since it is convenient to leave your money holdings in the bank earning some interest. If you hold your wealth in currency or in a checking​ account, you will receive either no interest or very low interest. Holding your wealth as money in currency or a checking account means you sacrifice some potential income. Since the new ATM is right next to your apartment building and is connected to your own​ bank, it is convenient to leave your money holdings in the bank earning some interest. ​No, if this withdrawal is an action that facilitates your normal level of transactions. Individuals hold money for three​ motives: to facilitate​ transactions, to provide​ liquidity, and to reduce risk. Money makes it easier to conduct everyday transactions. The amount of money people want to hold will depend on interest​ rates, the level of real​ GDP, and the price level. If you withdraw funds at your ATM only from your checking​ account, this withdrawal there has no effect on total money demand if this is an action that facilitates your normal level of transactions.

College Students and Tax Rebates. If the government distributes a rebate ​(as part of a temporary tax cut​) to tax​ payers, 10.3

a college student who receives the tax rebate is likely to use the rebate to increase current​ consumption, since she bases her consumption on current​ income, but a middle aged married man is likely to save the​ rebate, since he bases his consumption on permanent or​ long-term average income.

​Bailouts? Some critics of the​ Fed's actions with AIG and Bear Stearns said that the government was just bailing out failing financial firms and they should have been allowed to fail. The rationale of the Fed was

a complete collapse of the companies would devastate the financial system and cause a global panic. The Fed feared that a complete collapse of AIG and Bear Stearns would devastate the financial system and cause a global panic as investors would want to pull out their funds from all financial​ institutions, effectively causing a​ "run" in the financial markets. The Fed averted a major financial crisis but put U.S. taxpayers at risk by lending such a large amount to a private investment house.

Bitcoins as Store of Value. Bitcoins are a new form of​ electronic, privately issued money that can potentially preserve the anonymity of transactions. In recent​ years, the prices of a single Bitcoin has varied between​ $400 and​ $19,000. From the point of view of money as a store of​ value, Bitcoins are 13.1

a poor store of value because their prices fluctuate too much.

The multiplier effect occurs because 10.1

an initial change in output will affect the income of households and thus change consumer spending. The multiplier effect occurs because an initial change in output will affect the income of households and thus change consumer spending. For​ example, an increase in government spending of​ $10 billion will initially raise household incomes by​ $10 billion and lead to increases in consumer spending.

Frequent-flier miles can be saved with airlines and put toward purchasing future airline tickets or toward seat upgrades. Frequently-flier miles are not money because they 19_Ch13_slides1_money_Lecture Video/Quiz

are not a unit of account Most other goods & services do not have prices in terms of "Frequent-flier miles"

If firms become pessimistic (Keynesian "animal spirits") and I falls without a fall in productivity, then we expect wages to _________ in the short run but ______ in the long run 25_Ch15_slides1_long_run_AD_AS_model Lecture Video/Quiz

be unchanged; fall wages sticky in SR in LR prices fall and nominal wages fall (to meet the one and only equilibrium real wage)

The Fed provides a system of check collection and

clearing The Federal Reserve is responsible for making our system of complex financial transactions​ "work." This means that when Paul writes Freda a​ check, the Federal Reserve oversees the banks to ensure​ Freda's bank receives the funds from​ Paul's bank. This is known as check clearing. As our economy moves to more electronic​ transactions, the Federal Reserve provides oversight over these transactions as well.

The three functions of money do NOT include money as a A. medium of exchange. B. unit of account. C. collectible. D. store of value. 13.1

collectible. Three key properties of money​ include: medium of exchange​ (any item that buyers give to sellers when they purchase goods and​ services), a unit of account​ (a standard unit in which prices can be stated and the value of goods and services can be​ compared), and a store of value​ (the property of money that holds that money preserves value until it is used in an exchange.

a. The distribution of income has shifted to higher earning individuals who save more than lower earning ones. In this​ case, ____ will fall so that there could be insufficient aggregate demand.

consumption

All other things being equal, an increase in government borrowing 14ab_Ch10_part2_Lecture Video/Quiz

contributes to a trade deficit (current account deficit) and a capital account surplus

When reserves paid interest, banks

could keep reserves rather than make loans When banks earned no interest on either required or excess reserves it created an incentive for banks to keep minimal excess reserves and lend any extra funds they had. Once banks began to earn interest on excess​ reserves, they did not have to lend their funds out to earn interest.

SRAS shift when

foreign countries raised the world price of oil. Assume that policy makers do not take any action. An increase in oil prices shifts the​ short-run AS curve​ leftward, increasing prices and decreasing output.

To increase aggregate​ demand, a government can either_____ spending or _____ taxes 10.1

increase decrease

silver 13.1

is a good example of commodity money Gold or silver in bars or coins are examples of commodity money which has intrinsic value. Unlike gold or​ silver, fiat money has no intrinsic value. It is created by a government decree and becomes the official legal tender of the society.

Removing​ $100 Bills from​ Circulation? Economist Kenneth Rogoff at Harvard has recommended removing​ $100 bills from circulation. He made this recommendation because he believed these bills 13.1

just facilitate illegal transactions and tax evasion.

Which of the following is one way that the Fed cannot change the supply of​ money? A. changing reserve requirements B. the process of printing money C. open market purchases and sales D. changing the discount rate

the process of printing money The Fed can determine the supply of money through open market purchases and​ sales, changing reserve​ requirements, changing the discount​ rate, or increasing lending to banks and other institutions. Open market operations are the primary tool the Fed uses to implement monetary policy.

Which of the following is one of the primary sources of federal government​ revenue? 10.2

the social insurance tax

In the Great​ Depression, during the​ 1930s, 10.3

there was no net fiscal expansion. During the​ 1930s, politicians did not believe in modern fiscal​ policy, largely because they feared the consequences of government budget deficits. According to​ Brown, fiscal policy was expansionary only during 2 years of the Great​ Depression, 1931 and 1936. In those​ years, Congress voted for substantial payments to​ veterans, over objections of presidents Herbert Hoover and Franklin Roosevelt. Although government spending increased during the​ 1930s, taxes increased sufficiently during that same​ period, with the result that there was no net fiscal expansion.

The Fed can supply funds to the markets in the case of a financial panic because

they are the lender of last resort.

​Long-Run Deficit Projections. The Congressional Budget Office​ (CBO) makes​ long-run budget deficit projections. Although these projections are based on restrictive and often unrealistic​ assumptions, the CBO makes these projections 10.3

to help guide future fiscal policy.

The demand for money arising from individual and business use in ordinary business is the

transaction demand. The transaction demand for money is based on the desire to facilitate transactions.

T/F A Keynesian (AD) recession goes away by itself after AS falls and nominal wages adjust to the fall in the cost of living

true

T/F If a fall in M2 causes the real interest rate to rise in the short run but return to where is started in the long run, then the fall in M2 will cause the dollar to appreciate in the short run (NX down) and return to where it started (NX back up ) in the long run

true

T/F The actual money multiplier today is below 1.

true

The annual spring "stress tests" of larger US banks are designed to make it less likely that taxpayers will once again have to bail out the US banking system if it turns out that bank portfolios are riskier than regulators expect them to be and there is a 21_ch13_14_the Fed_Lecture Video/Quiz

true

US government borrowing is the highest in the world. As a share of GDP there are only three European countries whose federal -debt-to-GDP ratios are higher than that in the United States. Risks associated with high government borrowing include crowding out 27_Ch15_final slides_liquidity_trap Lecture Video/Quiz

true

When the Money Supply falls, real interest rates rise in the short run, leading to a fall in gross Investment, but in the long run Money Demand also falls at the lower price level and we return to the original real interest rate and level of Investment 26_Ch15_money neutrality_Lecture Video/Quiz

true

If the Federal Reserve pegs interest​ rates, it loses some of its control of the money supply.

true: When the Fed pegs an interest​ rate, they are committed to move the money supply to keep that interest rate.

Tax Multiplier​ =

ΔY/ΔT. Thus, income increases by ΔY = multiplier×ΔG for an increase in government spending and decreases by ΔY = multiplier×ΔT for an increase in taxes. This represents the amount by which the demand curve shifts.

T/F Corporate taxes are the largest component of federal revenue. 10.2

​False, it is individual taxes.

Personal Debt and Tax Cuts. Suppose you had a large unpaid balance on your credit card and were paying a high rate of interest. You then received a​ one-time tax rebate from the government and decided to pay down the balance on your credit card. If there were many others like you in the​ economy, would the tax cut be an effective​ stimulus? 10.3

​No, since debt reduction would not stimulate consumption.

Social insurance taxes and individual income taxes together comprise​ _____ percent of total federal revenue. 10.2

80 The single largest component of federal revenue is the individual income tax. Tax returns calculating the tax individuals or couples owed during the prior year must be filed by April 15 of every year. During the​ year, the federal government collects in advance some of the taxes due by withholding a portion of​ workers' paychecks. Taxpayers not subject to withholding or who earn income through investments must make estimated tax payments each​ quarter, so the tax due the federal government is paid evenly over the year in which it is earned. The​ second-largest component of federal revenue is social insurance​ taxes, which are taxes levied on earnings to pay for Social Security and Medicare.​ Today, social insurance taxes are almost as large as individual income​ taxes, and together they comprise 80 percent of total federal revenue. Unlike individual income​ taxes, social insurance taxes are paid only on wages and not on income from investments.

If the interest rate is 10 percent per​ year, the price of a bond that promises to pay $102 next year will be equal to ​$_____

92.73 X•1.1=102

Ceteris paribus, an increase in M2 is an increase in AD because 20_ch13_slides2_balance sheets_Lecture Video/Quiz

An increase in M2 is caused by an increase in bank lending, which implies an increase in spending

T/F In​ 1998, the federal budget showed a deficit 10.2

By​ 1998, the federal budget actually began to show surpluses rather than​ deficits, setting the stage for tax cuts.

Changing Views of Liquidity Traps. After he became Federal Reserve​ Chairman, Ben Bernanke no longer advocated a policy of increasing expectations of inflation in order to escape from a liquidity trap. What do you think might influence the Chairman of the Federal Reserve to disavow an inflationist​ policy?

Bernanke may have begun to recognize how many important decisions are made in financial markets that depend upon a relatively stable price level. Economist Larry Ball of Johns Hopkins University documents that Bernanke changed his mind about the virtues of creating expectations of inflation after hearing a presentation from the staff at the Fed. Ball attributes​ Bernanke's change of heart to​ "group think" and a unwillingness to dissent from a group consensus. It could be that Bernanke himself realized that creating expectations of inflation has dangerous long run consequences and the​ "inflation genie" cannot easily be put back into the bottle.

Under the Volker Rule (part of Dodd Frank) banks cannot use owner's equity to speculate (bet) against their customers 21_ch13_14_the Fed_Lecture Video/Quiz

Correct. They could not for example use owner's equity to buy a CDS on a bond if they do not themselves own the bond

The Fed thinks it is more valuable to save low rates for when there is a recession even if low rates aren't currently causing inflation. 1. Europe has kept rates lower than in the US and has been experimenting with negative interest rates during recessions 2. Raising rates during an expansion slows the expansion, causing a liquidity trap 3. Long run real interest rates are determined by Fed policy, so it matters a lot if the US and EU have different long-run monetary policies 4. all of these things are true 27_Ch15_final slides_liquidity_trap Lecture Video/Quiz

Europe has kept rates lower than in the US and has been experimenting with negative interest rates during recessions

Financial Crises and Dollars. During the financial crisis in​ 2007, there was an increased demand to hold U.S.​ dollars, despite the fact that the U.S. was the main source of the crisis. Which of the following statements best explains​ this? 13.1

Even with all the uncertainty surrounding the 2007 financial​ crisis, the U.S. dollar was seen as safe. During the financial crisis in​ 2007, there was an increased demand to hold U.S.​ dollars, despite the fact that the U.S. was the main source of the crisis. This was because even with all the uncertainty surrounding the 2007​ crisis, the U.S. dollar was seen as safe.

Money and Output Growth in the Long Run. Countries that have high money growth for long periods do not grow more rapidly than countries with low money growth. Which of the following best explains​ this?

High rates of money growth are usually inflationary rather than expansionary.

Which of the following will decrease the supply of​ money? A. Decreasing the federal funds rate. B. Increasing reserve requirements. C. Decreasing the discount rate. D. Purchasing bonds.

Increasing reserve requirements.

Political Effects of Dynamic Scoring. Congress mandated the Joint Tax Committee use dynamic scoring in 2015 for large tax changes. Do you think this made it easier or harder for Congress to cut​ taxes? 10.2

It made it easier to implement tax cuts because it would show less of a deficit. The process of incorporating macroeconomic effects in revenue estimates is known as dynamic scoring. The Joint Tax Committee​ (JCT) uses a number of different macroeconomic models to make their estimates. These incorporate different assumptions about the economy and each has its strengths and weaknesses. By using several​ models, the JCT hopes to provide more accurate estimates. In​ 2017, the JCT provided estimates based on dynamic scoring for President​ Trump's major tax cuts. Without taking into account the dynamic​ effects, the tax cuts would have increased the deficit by​ $1,456 billion.​ However, taking into account the effects on the​ economy, their estimate of the deficit was reduced by​ $451 billion.​ Therefore, dynamic scoring makes it easier to implement tax cuts as it would show less of a deficit.

The most basic measure of money in the United States is called 13.1

M1 and is the sum of currency in the hands of the​ public, demand​ deposits, other checkable​ deposits, and​ traveler's checks.

The graph to the right shows equilibrium in the money market. The equilibrium interest rate is​ 'r'. There has recently been an increase in consumer demand. With this shift in consumer​ demand, interest rates will _____ and investment spending will _____

Money demand Md shift right increase, decrease

Which of the following is tasked with ensuring that Americans living in poor neighborhoods have equal access to financial services? 1. The Community Reinvestment Act 2. The Consumer Financial Protection Bureau 3. The Federal Reserve System 4. No agency or Act ensures that is the case 28_part 1_place_based_policies_monetary - Lecture VideoQuiz

No agency or Act ensures that is the case

Fiscal year 2018 began on 10.2

October​ 1, 2017 The federal​ government's fiscal year in the U.S. is not the same as the calendar​ year, rather it starts on October 1 of the previous year.​ Thus, the fiscal year 2018 began on October​ 1, 2017.

The price of a bond is 14.3

The price of a bond is the payment​ promised, divided by one plus the interest​ rate: promised payment/ (1+interest rate)

The Rise and Fall of Fiscal Surpluses. Which of the following factors led the United States from federal surpluses at the end of the 1990s to deficits in the first decade of​ 2000? 10.2

Tax cuts combined with increased spending.

Crisis in the​ Short-Term Credit Market. In​ 1973, several major companies went bankrupt and were not going to be able to pay interest on their​ short-term loans. This caused a crisis in the market. There was concern that the​ short-term credit market would​ collapse, and that even healthy corporations would not be able to borrow. How did the Fed handle this​ situation?

The Fed extended additional credit to make sure the economy had plenty of liquidity. caused inflation which Volker wiped out in 80s, eventually leading to huge recession as result of this contractionary AD policy

The Federal Reserve is NOT​ the: A. agency that conducts monetary policy. B. U.S. central bank. C. agency that decides the tax rate. D. lender of last resort.

The Federal Reserve is NOT​ the: agency that decides the tax rate.

When the Fed engages in an Open Market Operation purchasing government securities 22_Ch14_money_markets Lecture Video/Quiz

The asset side of the balance sheet changes composition from reserves to securities

REAL-NOMINAL PRINCIPLE

What matters to people is the real value of money or income—its purchasing power—not its "face"value.

Too Big to​ Fail? The president of the Minneapolis Federal​ Reserve, Neel​ Kashkari, argues that banks today are too big to let fail and the government would have to bail them out in a true emergency. He believes the banks should be downsized to prevent this possibility. a) By​ "too big to​ fail," he means that if a bank is too​ big, _____ b) The costs of breaking up the large banks would depend on whether A. there are significant cost savings from having larger institutions. B. any cost savings would disappear if the bank was forced to reduce its size. C. fewer services would be​ provided, thereby reducing the efficiency of the financial system. D. All of the above are factors to consider when breaking up the large banks.

a) It's failure would cause extensive financial disruption, forcing the government to bail out the bank b) All of the above are factors to consider when breaking up the large banks.

Recessions and Interest Rates. a) Suppose the economy starts to head into a recession. Use a graph of the money market and show what happens to interest rates. b) From the​ graph, we can clearly see that the interest rate will c) When interest rates​ decrease, we know that the price of bonds will

a) Md shift left b) decrease c) increase

An Increase in the Riskiness of the Stock Market. If investors began to think the stock market is becoming less ​risky, how will this belief affect the demand for​ money? The demand for money will This would have

a) decrease since people will prefer assets that have more risk and a higher return Money and stock are alternative assets. A higher demand for one will lower the demand for the other. When stock market is less ​risky, individuals will shift away from less​ risky, more certain assets such as currency or money and the demand for money will decrease since people will prefer assets that have more risk and a higher return. b) more affect on M1 since money is a larger component of M1 than of M2.

Required Reserves During the Great Depression. During the Great​ Depression, banks held excess reserves because they were concerned that depositors might be more inclined to withdraw funds from their accounts. At one​ point, the Fed became concerned about the​ "excess" reserves and raised the reserve requirements for banks. a. Assuming that banks were holding excess reserves for precautionary​ purposes, would they continue to hold excess reserves even after reserve requirements were​ raised? b. After the Fed raised the reserve​ requirement, the money supply would

a. yes b. decrease When the reserve requirement goes​ up, the money multiplier 1/reserve requirement falls, which creates a smaller money supply.

Excess reserves held by private US banks are _________ which puts _________ current inflation and puts ________ on future inflation 24_monetary data_Lecture Video/Quiz

above average; downward pressure; upward pressure

The 1981 tax cuts that occured during the beginning of the first term of President Ronald Reagan emphasized the effects of 10.3

aggregate supply and not increases in aggregate demand. The tax cuts enacted during 1981 at the beginning of the first term of President Ronald Reagan were significant.​ However, they were not proposed to increase aggregate demand.​ Instead, the tax cuts were justified on the basis of improving economic incentives and increasing the supply of output. In other​ words, they were​ supply-side motivated. Taxes can have important effects on the supply of​ labor, saving, and economic growth. Proponents of the 1981 tax cuts emphasized the effects of supply and not increases in aggregate demand.

Gift Cards. Gifts cards have grown in popularity as a mechanisms to give gifts. Cards are available for popular book stores and for coffee shops. Gift cards 13.1

are not considered part of the money supply since they have a fixed value paid for in advance. Gift cards are used in a manner very similar to a debit card. The card is​ loaded, or​ credited, with a set value. That value can then be used to make purchases. Debit cards are used to electronically withdraw funds directly from the cardholders accounts. When you use your debit card to make a purchase—say at a supermarket—it is exactly the same thing as writing a check.​ Thus, a debit card​ (and a gift​ card) is not an independent source of money. The money supply consists of the balances in checking accounts plus currency held by the public.

​(7) The uses of the funds of a​ bank, including loans and reserves.

assets

Banks consider loans they make to be _____. If a customer brings in​$2,000 to deposit into a checking​account, it is _____for the bank. If a customer enters the bank and secures a​ $2,000 personal​ loan, it is _____ or the bank.

assets; a liability; an asset

Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called 10.2

automatic stabilizers.

​(5) An account statement for a bank that shows the sources of its funds​ (liabilities) as well as the uses of its funds​ (assets).

balance sheet

​Traveler's checks are sold by 13.1

banks and​ non-banks and can be used for purchases in any enterprise.

Setting the Interest Rate on Reserves. If the Fed set an interest rate on reserves close to the market interest rate on commercial​ loans,

banks would have little incentive to make loans. When banks earned no interest on either required or excess reserves it created an incentive for banks to keep minimal excess reserves and lend any extra funds they had. Once banks began to earn interest on excess​ reserves, they did not have to lend their funds out to earn interest. If the Fed set an interest rate on reserves close to the market interest rate on​ loans, banks would have little incentive to make loans. Lending opportunities would be less​ attractive, and banks can safely keep their funds on hand.

Money solves the problem of double coincidence of wants that would regularly occur under a system of 13.1

barter

According to the Opportunity Atlas data seen in class, which of the following is NOT generally correlated with low economic opportunities? 1. living in a neighborhood with high teen birth rates 2. being the offspring of an immigrant mother 3. living in a neighborhood with high incarceration rates 4. living in a neighborhood with low high school graduation rates 28_part 2_place_based_policies_fiscal Lecture Video Quiz

being the offspring of an immigrant mother

The Federal Reserve arranged for JPMorgan Chase​ & Co. to ____ Bear Stearns during the financial crisis in 2008.

buy but only after the Fed agreed to loan Chase​$30 billion.

If the Federal Reserve wishes to increase the money supply to stimulate the​ economy, it

buys government bonds from the private sector in open market purchases. If the Federal Reserve wishes to increase the money supply to stimulate the economy​ (perhaps it is operating too​ sluggishly), it buys government bonds from the private sector in open market purchases. If the Fed wishes to decrease the money supply to slow the economy down​ (perhaps it is growing too quickly and inflation is​ occurring), it sells government bonds to the private sector in open market sales.

In the United​ States, the A. chairperson of the Board of Governors is required to report to Congress on a regular basis. B. chairperson of the Board of Governors is elected by Congress. C. Federal Reserve Board members are elected by Congress. D. Federal Reserve Board members are elected by all citizens. 13.3

chairperson of the Board of Governors is required to report to Congress on a regular basis. In the United​ States, the chairperson of the Board of Governors is required to report to Congress on a regular​ basis, but in practice the Fed makes its own decisions and later informs Congress what it did. The Fed chairperson also often meets with members of the executive branch to discuss economic affairs. Following the​ Fed's interventions during the financial​ crisis, there is increasing interest in Congress to make the Fed disclose additional information.

Auditing the​ Fed? In recent​ years, several members of Congress have sponsored bills that would subject the Fed to audits of its monetary policy. This is a form of intensive Congressional oversight. What are the pros and cons of more Congressional oversight of the​ Fed? Increased oversight can

create pressure to help finance a​ country's government deficit by creating money. There has been a lively debate among economists and political scientists as to whether countries with more independent central banks​ (banks with less external political​ pressure) experience less inflation. Central banks that are not independent will always be under pressure to help finance their​ country's government deficits by creating money.

The Treasury Secretary and the Fed. ​Occasionally, some economists or politicians suggest that the Secretary of the Treasury become a member of the Federal Open Market Committee. This would most likely ____ the independence of the Federal Reserve.

decrease

An open market sale of bonds by the Fed would

decrease the money​ supply, shift the money supply curve to the​ left, and raise interest rates.

Understanding M1 and M2. If you write a check from your checking account to your money market​ account, M1 will _____ and M2 will

decrease; remain the same checking account included in M1, money market​ accountnot inc in M1 but is in M2

Debit Cards. In recent​ years, debit cards have become popular. Debit cards allow the holder of the card to pay a merchant for goods and services directly from a checking account. The introduction of debit cards most likely ___ the amount of currency in the economy. 13.1

decreased

A budget _____ is the amount by which government spending exceeds revenues in a given year. A budget _____ is the amount by which government revenues exceed government expenditures in a given year. 10.2

deficit; surplus

​(3) Any additional reserves that a bank holds above required reserves.

excess reserves

From 1966 to​ 1969, there was a 10 percent surcharge that 10.3

did not decrease consumer spending as much as economists had initially estimated. From 1966 to​ 1969, the overall unemployment rate fell below 4 percent. Policymakers became concerned that the economy was overheating and this would lead to a higher inflation rate. In​ 1968, a temporary tax surcharge of 10 percent was enacted to reduce total demand for goods and services. The 10 percent surcharge was a​ "tax on a​ tax," so it raised the taxes paid by households by 10 percent.​ Essentially, the surcharge was specifically designed to be temporary and expired within a year. The surcharge did not decrease consumer spending as much as economists had initially​ estimated, however. Part of the reason was that it was temporary. Economists who have studied consumption behavior have noticed that consumers often base their spending on an estimate of their​ long-run average​ income, or permanent​ income, not on their current income.

Where Should Regional Banks Be Located​ Today? Given the changes in the location of economic activity that have occurred since the founding of the Federal​ Reserve, how would the location of the regional banks change if they were allocated by economic​ activity? The locations of the banks and the branches would be _____ since economic activity has geographically shifted. There would probably be more banks in the _____, and the _____ district would be​ smaller, or have more banks.

different; west; San Francisco The location of Federal Reserve district boundaries and of the banks within the districts was determined mostly by the geographic distribution of the U.S. population at the time the Federal Reserve System was created​ (1913) to accommodate local needs. Over​ time, branches of the Federal Reserve Banks have been added to accommodate changing needs. The Federal Reserve Bank of San​ Francisco, for​ example, has added four branches—in Seattle, Portland, Salt Lake​ City, and Los Angeles.

Banks borrow from the Fed at​ the:

discount rate.

if $500 is deposited into a checking account in a​ bank, then the money​ supply: If the bank that received the $500 deposit keeps 4​% of it as reserves and loans out the​ remainder, then the money supply will increase by $ The money multiplier provides the maximum increase in checking account balances for any initial cash deposit. It is given by the​ ratio: Thus, if the reserve ratio is 4​%, then the money multiplier is _____ If the reserve ratio is 4​% for all​ banks, banks hold no excess reserves and checking account balances increase by the full amount of all loans​ made, then the initial $500 deposit will result in a maximum increase in checking account balances throughout all of the banks of $_____ and increase the money supply by $_____

does not change 480 1/ reserve ratio 25 12500; 12000 increase in checking account balances= money multiplier= initial deposit•(1/reserve ratio) = 500/.04=12500 increase the money supply: maximum increase in chequing account balances- initial cash deposit: 12500-500= 1200

Partnerships and Corporate Tax Revenues. In recent​ years, many large organizations—such as global accounting firms—have been structured as partnerships for tax purposes rather than corporations. This meant that they did not have to pay the corporate tax. The growth of partnerships as a form of business organization can explain some of the 10.2

drop in corporate tax revenue that has occurred. The corporate tax is a tax levied on the earnings of corporations. This tax raised less than 8 percent of total federal revenues during fiscal year 2011. The tax was a more important source of revenue in past decades but has declined to​ today's relatively low level. This decline has been attributed to many​ factors, including falling corporate profits as a share of​ GDP, the growth of opportunities for tax​ shelters, incentives provided by Congress to stimulate business investment and research and​ development, and complex rules for taxing multinational corporations that operate on a global basis.

During a​ recession, policymakers should 10.2

either increase government spending or cut taxes. (this would increase aggregate demand) If the budget were initially balanced and the economy plunged into a​ recession, a budget deficit would emerge as tax revenues fell and expenditures increased. To combat the​ recession, policymakers could then either increase government spending or cut taxes. Both​ actions, however, would increase the deficit. Despite concerns about increasing the​ deficit, this is precisely the right policy. If policymakers tried to avoid running a deficit by raising taxes or cutting​ spending, that would actually make the recession worse. The key lesson here is that during a​ recession, we should focus on what our fiscal policy actions do to the​ economy, not what they do to the deficit.

From 2001 until​ 2008, 10.3

expansionary policies were used to stimulate the economy. During his first year in office in​ 2001, President George W. Bush passed a​ 10-year tax cut plan that decreased tax​ rates, in part to eliminate the government surpluses and return revenues to​ households, but also to stimulate the economy that was slowing down as the​ high-tech investment boom was ending. In May​ 2003, President Bush signed another tax bill to stimulate the sluggish economy​ and, in​ particular, to increase investment spending. In​ 2008, a slowing economy led President Bush and Congress to adopt tax rebates and some investment incentives in early 2008. The tax cuts were relatively​ large, approximately 1 percent of​ GDP, and the​ rebates, some as large as​ $1,800, were designed to reach 128 million households. In February​ 2009, President Obama and Congress enacted the largest stimulus package in United States history. The stimulus package proved to be controversial both in its size and composition. While many economists believe it helped the economy​ recover, others have been more skeptical.

T/F If the Fed uses an open market operation to buy government securities, this is an increase in government borrowing 22_Ch14_money_markets Lecture Video/Quiz

false

T/F Interest rates typically rise in a recession because the demand for money increases when real income falls.

false

T/F Money market mutual funds are hard to classify in a definition of money because they are only held to facilitate transactions. 13.1

false

T/F Not much U.S. currency is in global circulation because it is an unsafe asset compared to assets denominated in foreign currency. 13.1

false

T/F The San Francisco Federal Reserve Bank is the only one in the West because San Francisco outbid sacramento to be its host

false

T/F Monetary policy in the period 2017-June 2019 is best described as accomodative accommodative 24_monetary data_Lecture Video/Quiz

false fiscal policy has been expansionary but monetary policy has been contractionary- monetary policy works against fiscal policy

T/F President Trump is trying to pressure the Fed to use expansionary monetary policy. No president has ever tried to pressure the Fed before. 24_monetary data_Lecture Video/Quiz

false pres always prefers expansionary during term- trump thought policy was too expansionary but then changed mind once in office- common - have to keep pres's natural tendencies from upsetting balance between fiscal and interests

T/F The Secretary of the Treasury who developed the idea of stress tests was Henry Paulson.

false Timothy Geithner

Through its effect on money​ demand, a decrease in prices will increase interest rates.

false When prices decrease​, the real value of money rises. So in order to keep the same purchasing​ power, the demand for money will decrease​, which causes a decrease in interest rates.

T/F: Banks versus Insurance Companies. Even though both insurance companies and banks are financial​ intermediaries, macroeconomists study insurance companies more intensively because insurance companies have a much larger and direct impact on the money supply.

false: banks have a much larger and direct impact on the money supply.

Banks trade reserves with one another in​ the:

federal funds market.

Federal​ spending, spending by the U.S.​ government, consists of two broad​ components: 10.2

federal government purchases of goods and services and transfer payments. Federal​ spending, spending by the U.S.​ government, consists of two broad​ components: federal government purchases of goods and services and transfer payments. Discretionary spending constitutes all the programs that Congress authorizes on an annual basis that are not automatically funded by prior laws. It includes defense spending and all nondefense domestic spending. Entitlement and mandatory spending constitutes all spending that Congress has authorized by prior law.

The value of the money multiplier____ sharply around 2008.​ Thereafter, its value remained _____ until the end of 2017. Post​ 2018, its value came close to _____ This change in the series was because the Federal Reserve began paying interest on _____

fell; below 1; 1; reserves The figure shows that the value of the money multiplier fell sharply around 2008.​ Thereafter, its value remained below 1 until the end of 2017. Post​ 2018, its value approached 1. This is because the Federal Reserve began paying interest on reserves.

Aggregate demand will increase when 10.1

government spending increases because government spending is a component of aggregate demand. Increases in government purchases directly increase aggregate demand because they are a component of aggregate demand. Decreases in government purchases directly decrease aggregate demand. Changes in taxes affect aggregate demand indirectly. For​ example, if the government lowers taxes consumers​ pay, consumers will have more income at their disposal and will increase their consumption spending. Because consumption spending is a component of aggregate​ demand, aggregate demand will increase as well. Increases in taxes will have the opposite effect. Consumers will have less income at their disposal and will decrease their consumption spending. As a​ result, aggregate demand will decrease. Changes in taxes can also affect businesses and lead to changes in investment spending.​ Suppose, for​ example, that the government cuts taxes in such a way as to provide incentives for new investment spending by businesses. Because investment spending is a component of aggregate​ demand, the increase in investment spending will increase aggregate demand.

Shorter Business Cycles and Lags. Suppose the typical business cycle becomes shorter. This makes the conduct of active fiscal policy 10.1

harder because lags in policy can now do potentially more harm. It is very difficult to implement stabilization policies for two big reasons.​ First, there are​ lags, or​ delays, in stabilization policy. Lags arise because decision makers are often slow to recognize and respond to changes in the​ economy, and fiscal policies and other stabilization policies take time to operate. Inside lags refer to the time it takes to formulate a policy. Outside lags refer to the time it takes for the policy to actually work.

In a financial crisis like those that occurred in 2001 and​ 2008, the Fed can A. help stabilize the economy by adjusting its policies and relationships with banks. B. use contractionary policy to offset expansionary fiscal policy and prevent inflation. C. coordinate with central banks in other countries to weaken their economies. D. keep interest rates a bit higher to prevent deflation.

help stabilize the economy by adjusting its policies and relationships with banks. In a financial crisis like those that occurred in 2001 and ​ 2008, the Fed can help stabilize the economy by adjusting its policies and relationships with banks. Current and recent Fed chairmen have been powerful figures in the national economy.

If the Fed purchased​ long-term government bonds held by the​ public, then the supply of money would

increase

Open market sales lead to falling bond​ prices, which cause interest rates to

increase

Checking Account Interest Rates. During the​ 1980s, banks started to pay interest​ (at low​ rates) on checking accounts for the first time. Given what you know about opportunity​ costs, the interest paid on checking accounts would _____ the demand for money.

increase The opportunity cost of holding money is the interest rate that can be earned on other assets. If money can earn a small interest​ rate, it reduces the opportunity cost of holding money.

China's Increase in Reserve Requirements. The Chinese government purchased U.S. dollars in the foreign exchange market with Chinese currency. During the same​ period, the Chinese sharply raised the reserve requirement on banks because they wanted to prevent the money supply from expanding too rapidly. The effect of the Chinese​ government's purchase of U.S. dollars in the foreign exchange market with Chinese currency would be to _____ the supply of Chinese currency. Since the Chinese wanted to prevent the money supply from expanding too​ rapidly, they raised the reserve requirement on​ banks, _____ the ability of banks to make​ loans, thereby _____ the Chinese money supply.

increase : open mkt bond purchases increase Ms When the Chinese government buys U.S. dollars​ (by selling Chinese​ currency), this transaction raises the supply of Chinese currency. reducing; decreasing If the central bank wishes to increase the supply of​ money, it can reduce​ banks' reserve requirements so they have more money to loan out. This would expand the money supply. To decrease the supply of​ money, the central bank can raise reserve requirements.

demand shocks such as an increase in​ investment)

increase the price level and decrease unemployment.

On 2019−10−23​, the value of the M1 money multiplier was 1.212 If the Fed wanted to increase the stock of M1 by ​$1 billion, it would have to put additional reserves of $___ billion into the system.

increase the stock of M1=deposit•money multiplier 1billion= additional reserves•1.212 1 bil/ 1.212= .825 bil

Tax cuts in 2008 under President​ Bush, the large stimulus package of 2009 under President​ Obama, and the tax cuts of 2017 under President Trump ____ the debt to GDP ratio _____ and could limit the ability of the U.S. government to conduct expansionary fiscal policy in the near future 10.3

increased; significantly

If banks create more loans then it is easier for borrowers to get loans and they can shop around for a low rate 22_Ch14_money_markets Lecture Video/Quiz

interest rates fall. At the lower interest rate households are less interested in seeking out returns and leave more in the bank Md = M2 M2 increases and there is a movement down and along Md as a change in interest rates is a movement along the curve

Net Interest in the Budget. Net interest will increase when _____ rates rise and when the stock of _____ held by the public increases. 10.2

interest; debt Net interest will increase when interest rates rise and when the stock of debt held by the public increases.

A Social Security payment to a retiree is 14ab_Ch10_part 1_Lecture Video/Quiz

is related to the amount the retiree was forced to save through Social Security payroll taxes during his/her working life

It is very difficult to implement stabilization policies because of 10.1

lags and the inability to accurately forecast aspects of the economy. It is very difficult to implement stabilization policies for two big reasons.​ First, there are​ lags, or​ delays, in stabilization policy. Lags arise because decision makers are often slow to recognize and respond to changes in the​ economy, and fiscal policies and other stabilization policies take time to operate.​ Second, economists simply do not know enough about all aspects of the economy to be completely accurate in all their forecasts.

​(2) The sources of funds for a​ bank, including deposits and​ owners' equity

liabilities

Quantitative Easing (QE) is very much like a regular open market operation (OMO). The main difference is that in the case of QE the Fed buys ______ and in an OMO the Fed buys _____ 23_Ch14_monetary policy_and_data_Lecture Video/Quiz

long term assets; short term assets

Inside lags are

longer for fiscal policy than for monetary policy.

Banks create money by

making loans which increases deposits because the required reserve ratio is a fraction of deposits. Banks create money by making loans which are then deposited in a bank. A fraction of the loan deposited can be lent​ out, creating more​ deposits, and​ thus, more money​ (M1).

Which of the following is an entitlement​ program? 10.2

medicare spending

The FOMC is responsible for

monetary policy.

The Federal Open Market Committee​ (FOMC) votes​ on: A. discount loans. B. the discount rate. C. monetary policy. Your answer is correct. D. the reserve requirement.

monetary policy.

According to the Keynesian AD-AS model, each stimulus check from the government would have a ___________ impact on GDP102_CARES Act as of August 3 - Lecture Video Quiz

more than one-for-one

The demand for money depends _____ on the interest rate and _____ on the level of prices and real GDP. 14.1

negatively; positively The demand for money depends negatively on the interest rate and positively on the level of prices and real GDP.

Tax Refunds and Consumer Spending. In​ 1999, the Internal Revenue Service began to mail out refund checks because of changes in the tax law in 1998. Assuming that taxpayers were not aware that they receive refunds until they completed their income tax statements​, the result of the refund would be _____ in consumption expenditure. 10.2

no change

A Chinese Experiment. In​ 2000, the Chinese government mandated three​ one-week holidays throughout the year to stimulate consumer spending. The idea was that these extended vacations would induce the Chinese to spend more of their earnings while on vacation. Although consumption spending rose during the vacation​ period, the data show that consumption fell before and after the vacation by approximately the same amount as spending rose during the vacation. As a​ result, there was ____ change in aggregate demand and the overall policy of stimulating the economy through mandated vacations was ____ effective 10.1

no; not

In the long run after a negative AD shock 25_Ch15_slides1_long_run_AD_AS_model Lecture Video/Quiz

nominal wages are lower, nominal prices are lower, and real wages are where they started

Greek Cash Euro Holdings.​ "Greeks have increased their holdings of euros in cash because they have great faith in the monetary system of​ Europe." 1) This quote is 2) The reason that the Greeks held cash in euros is because they 13.1

not accurate thought that Greece might exit the system and the older Greek currency would have less value.

The time it takes for policy actions to have their effect on the economy is known as 10.1

outside lags

​(4) The funds provided to a bank by its owners.

owners equity

​Long-run average income is known as 10.2

permanent income

Pricing a Bond. A bond promises to pay ​$105 next year and the interest rate is 7 percent per year. a. What will the price of the bond​ be?

price of bond= promised payment/ (1+interest rate) 105=1.07 • X

price of bond=

promised payment/ (1+interest rate)

to increase the supply of​ money, the Fed should_____ bonds

purchase

Buy or Sell​ Bonds? If you strongly believed that the Federal Reserve was going to surprise the markets and decrease interest​ rates, you would want to _____ bonds.

purchase less return from money in bank

According to the Keynesian AD-AS model from class, an increase in the UI benefit should 102_CARES Act as of August 3 - Lecture Video Quiz

reduce the size of the AE multiplier, reducing the impact of a negative AD shock

The States and Balanced Budgets. In the​ U.S., virtually all states have requirements that they either plan for or maintain a balanced budget. If the national economy experiences a​ recession, states should ______ their spending and perhaps also _____ their taxes to balance their budgets.

reduce; increase

Successfully timed stabilization policies _____ fluctuations in​ GDP, but​ ill-timed policies make economic fluctuations _____ 10.1

reduce; larger

​(6) The amount of their deposits that banks are required by law to hold as reserves.

required reserves

The portion of​ banks' deposits set aside in either vault cash or as deposits at the Federal Reserve.

reserves

An expansionary fiscal policy shifts the aggregate demand curve to the _____, _____ Prices, and _____ real GDP 10.1

right; raises; increases

Just Raise​ Taxes? As the population ages and entitlement spending on Social Security and Medicare​ increase, some have argued that we should just raise taxes to pay for them. The main argument against this solution is that the level of entitlements as a fraction of GDP is predicted to 10.2

rise so high that raising taxes would dramatically increase the tax burden on the economy and impede economic growth. The problem is that the level of entitlements as a fraction of GDP is predicted to rise so high that raising taxes would dramatically increase the tax burden on the economy and impede economic growth.

The largest component of M2 is/are 13.1

savings deposits Savings deposits are the largest component of​ M2, followed by​ M1, small time​ deposits, and money market mutual funds. Currency is the largest component of​ M1, the most basic measure of money. Demand and other checkable deposits are the next largest components.

Assume a bank owns numerous mortgages, which is packages into a portfolio which it sells to investors. The bank has engaged in

securitization

As the Federal Reserve ________ bonds, interest rates rise and the price of bonds ________.

sells; falls

Political Systems and the Inside Lag for Fiscal Policy. Under a parliamentary system like in​ Britain, there are fewer checks and balances on the government than in the United States. In a parliamentary​ system, the party that controls the legislature also runs the executive branch. Consider the inside lag for fiscal policy in England compared to that in the United States. The inside lag would be 10.1

shorter in England since it would be easier to reach a consensus on policy changes. Economists recognize two broad classes of​ lags: inside lags and outside lags. Inside lags refer to the time it takes to formulate a policy. In a parliamentary​ system, the party that controls the legislature also runs the executive branch. This would make it easier to reach a consensus on policy changes.

Reducing Payroll Taxes as a Stimulus Policy. One part of President​ Obama's stimulus policy was to reduce payroll taxes paid by individuals. The theory is that this would put more money in the hands of workers and lead to higher spending. For this policy to​ work, it assumes that workers will _____ any additional​ income, thereby _____ aggregate demand 10.1

spend; increasing Changes in taxes affect aggregate demand indirectly. For​ example, if the government reduces payroll taxes individuals​ pay, workers will have more income at their disposal and will increase their consumption spending. Because consumption spending is a component of aggregate​ demand, aggregate demand will increase as well.

Decisions about the supply of money are made by

the Federal Open Market Committee which includes the seven members on the Board of Governors and the president of the New York Federal Reserve Bank. Decisions about the supply of money are made at the Federal Open Market Committee​ (FOMC), which includes the seven members on the Board of Governors and the president of the New York Federal Reserve​ Bank, as well as four of the 11 other regional bank​ presidents, who serve on a rotating basis.

One problem with commodity money systems and with convertible currency systems like the gold standard is that 1. the commodity value of the monetary base can fluctuate in a destabilizing way 2. there can't be economic growth unless there is more money to use to buy things 19_Ch13_slides1_money_Lecture Video/Quiz

the commodity value of the monetary base can fluctuate in a destabilizing way

We measure the opportunity cost of holding money​ with:

the interest rate.

When the Federal Reserve conducts an open market purchase of government​ bonds,

the money supply​ increases, interest rates​ decrease, and investment spending increases.

The liquidity demand for money represents

the needs and desires individuals and firms have to make transactions on short notice without incurring excessive costs.

A Keynesian (AD) recession goes away by itself after AS falls and nominal wages adjust to the fall in the cost of living 25_Ch15_slides1_long_run_AD_AS_model Lecture Video/Quiz

true

An increase in the money supply causes interest rates to fall, which causes a movement down and along the Investment demand curve, which causes I and AD to both rise, which causes w/p to fall, and both L and GDP to rise if nominal wages are sticky 23_Ch14_monetary policy_and_data_Lecture Video/Quiz

true

Deposits in checking accounts are included in the definition of money because they are a very liquid asset. 13.1

true

Financial intermediaries are a crucial part of the infrastructure of an economy because they play such an important part in the efficiency and distribution of both the payments system and management of household savings 20_ch13_slides2_balance sheets_Lecture Video/Quiz

true

Fiscal policy has a long-run impact on real interest rates (and I) and therefore on exchange rates (and NX) whereas monetary policy has no long run impact on real interest rates (shift in M2 is followed by shift in Md) so monetary policy is long run "neutral" 26_Ch15_money neutrality_Lecture Video/Quiz

true

Government debit is monetized if the debt is essentially paid off by printing money (causing inflation and reducing the value of the debt in real terms) 24_monetary data_Lecture Video/Quiz

true

If a fall in M2 causes the real interest rate to rise in the short run but return to where it started in the long run, then the fall in M2 will cause the dollar to appreciate in the short run (NX down) and return to where it started (NX back up) in the long run 26_Ch15_money neutrality_Lecture Video/Quiz

true

Increasing the money supply increases GDP in the short run but causes inflation once wages and prices stop being sticky. Elected officials tend to care more about the short run than the long run and so central bank independence from policy interference is 21_ch13_14_the Fed_Lecture Video/Quiz

true

Open market operations can only increase lending to firms and households if banks don't hold it all in reserve 22_Ch14_money_markets Lecture Video/Quiz

true

Regulators want to keep banks from making too many risky loans, but don't want to stop them from taking on any risk at all, as risky loans can be in new areas of innovation, which is good for economic growth. They are always fine-tuning this regulation. 20_ch13_slides2_balance sheets_Lecture Video/Quiz

true

A necessary condition for the classical model to work is that

wages and prices are fully flexible.

Under the CARES Act the PPP offered loan forgiveness to small firms that met certain requirements; the initial loans 28_part 1_place_based_policies_monetary - Lecture VideoQuiz

were made by private banks, who took on the pandemic loan risk if the borrowers did not end up fulfilling the PPP requirements

Under the CARES Act, the PPP offered loan forgiveness to small firms that met certain requirements; the initial loans

were made by private banks, who took on the pandemic loan risk if the borrowers did not end up fulfilling the PPP requirements

Dividends and Stress Tests. If a bank fails a stress​ test, the Fed A. will not let a bank pay dividends to its shareholders. B. will take over operations of the bank. C. will shut it down. D. requires a bank to pay dividends to its shareholders.

will not let a bank pay dividends to its shareholders. The Fed will not let a bank pay dividends to its shareholders if it fails a stress test.

If the required reserve ratio is 0.20​, and there is a cash withdrawal of $1,000​, there would be a total decrease in checking account balances of $ 13.2

would lead to a total decrease in checking account balances equal to the the money multiplier times the change in​ deposits: withdrawal/ money multiplier 1000/.2

Should the Fed Buy​ Stocks? Could the Fed purchase a wide variety of stocks in the market in order to raise the price of​ stocks?

​Yes, but the problem would be that some stock prices would increase more than others. In principle the Fed could do this and it could raise the price of stocks. The problem is that the Fed could not easily buy stocks equally and would therefore affect which stock prices would rise relative to others.

If potential output is ________ than the current level of GDP, the unemployment rate is ________ the natural rate.

greater; above

liquidity trap

a situation in which conventional monetary policy is ineffective because nominal interest rates are up against the zero bound

Quantitative Easing is the name attached to the Fed policy of 22_Ch14_money_markets Lecture Video/Quiz

buying MBS's (and a few other CDO's) rather than the government securities on the open market

The top 1% of the income distribution contribute about 40% to overall income tax collection 14ab_Ch10_part2_Lecture Video/Quiz

True

When the Money Supply falls, real interest rates rise in the short run, leading to a fall in gross investment, but in the long run money demand also falls at the lower price level and we return to the original real interest rate and level of investment

True

Stabilization Policy and the Speed of Adjustment. Economists who believe that the transition from the short run to the long run occurs rapidly do not generally favor using active stabilization policy. This is because if the transition from the short run to the long run occurs​ quickly, active stabilization policies

can destabilize the economy.

The goal of "Enterprise Zones" in the 1980s and of "Opportunity Zones" in the past few years is to 28_part 2_place_based_policies_fiscal Lecture Video Quiz

create tax incentives for firms to create jobs in low-income neighborhoods

If the unemployment rate is above the natural rate, then we expect to see

falling nominal wages, causing the short-run aggregate supply curve to shift down and to the right.

T/F Economic analyses of the Great Recession tell us that fiscal policies don't work to stimulate GDP 15_Ch10_stabilization_slide3 Lecture Video/Quiz

false

T/F European-style "socialized medicine" is a bigger burden on their government budgets than the US system is on the US federal budget

false

T/F Social Security is currently under-funded by about 25%, but government still has to repay retirees for their forced savings because it is an Entitlement program 14ab_Ch10_part 1_Lecture Video/Quiz

false social security contract off budget: if there isnt sufficient tax collections to make obligations then retirees will lose their savings. For average American this means losing 25% of half their life savings

In general, Keynesian economists think that a $1 increase in G will increase GDP by ____ and Classical economists think that it will increase GDP by _______ (ceteris paribus) 15_Ch10_stabilization_slide3 Lecture Video/Quiz

more than a dollar; less than a dollar

A Chinese Experiment. In​ 2000, the Chinese government mandated three​ one-week holidays throughout the year to stimulate consumer spending. The idea was that these extended vacations would induce the Chinese to spend more of their earnings while on vacation. Although consumption spending rose during the vacation​ period, the data show that consumption fell before and after the vacation by approximately the same amount as spending rose during the vacation. As a​ result, there was _____ change in aggregate demand and the overall policy of stimulating the economy through mandated vacations was ____ effective

no; not

Which of the statements below correctly relates​ Blinder's findings to the argument that the tradition of a strong chairman in the United States reduces the effectiveness of monetary​ policy?

A strong Fed chairman will cause the Board to act more like an​ individual, thereby reducing the ability to distinguish between trends and random events- a necessity for effective monetary policy. The results of​ Blinder's experiment showed that committees make decisions as quickly​ as, and more accurately​ than, individuals making decisions by themselves. A strong Fed chairman will cause the Board to act more like an​ individual, thereby reducing the ability to distinguish between trends and random events- a necessity for effective monetary policy.

Foreign Firms Close Their​ Markets: Short Run and Long Run Effects. Suppose the economy is at full employment and foreign firms close their markets and U.S. firms start to produce less for export. Everything else remains the same. In the short​ run, U.S. GDP will ___ Assuming that exchange rates do not​ change, in the long​ run, U.S. prices can be expected to _____

Decrease In the short​ run, GDP is determined by the current demand for goods and services in the​ economy, so changes in any one of the components of aggregate demand​ (consumption, investment, government spending and net​ exports) can affect GDP.​ Hence, in the short​ run, a decrease in net exports will cause a leftward shift in the aggregate demand​curve, leading to a decrease in GDP. Decrease A short run decrease in exports will cause a leftward shift in the aggregate demand curve and decrease prices in the short run. Since the economy was initially producing at full​ employment, the shift in the aggregate demand pushed the economy below full employment. If the economy is producing at a level below full​ employment, firms will find it easier to hire and retain​ workers, and unemployment will be above its natural rate. Workers will find it harder to get and change jobs. Firms decrease their workforce and wages will decrease. This causes the​ short-run aggregate supply curve to shift to the right which will in turn will decrease prices in the long run.

The Fed thinks it is more valuable to save low rates for when there is a recession even if low rates aren't currently causing inflation. - Raising rates during an expansion slows the expansion, causing a liquidity trap - Europe has kept rates lower than in the US and has been experimenting with negative interest rates during recessions - Long run real interest rates are determined by Fed policy, so it matters a lot if the US and EU have different long-run monetary policies

Europe has kept rates lower than in the US and has been experimenting with negative interest rates during recessions

​T/F: Keynes's objection to​ Say's Law was that it is possible that demand creates its own supply

False: ​Keynes' objection to​ Say's law was that demand might be less than output for extended periods of time.

Which of the following would happen in the SHORT RUN when the Fed conducts open market sale of government bonds?

Interest rate increases as money supply goes down, investment goes down, net export goes down

According to the language and theory from class, how is the equilibrium expected real rate of return from making a loan affected by an increase in risk?

It stays the same because nominal rates adjust to cover the higher default risk

Side Effects of Supporting a Currency. Suppose United​ States' currency came under attack by speculators and to prevent the value of its currency from​ falling, the central bank needed to raise interest rates. What would be the side effect of such a​ policy?

Net exports will fall. If the Fed conducts an open market sale of​ bonds, U.S. interest rates rise. An increase in interest rates will reduce both investment spending​ (including consumer​ durables) and net exports. As a​ result, foreign investors earning lower interest rates elsewhere will want to move their money to the United States where they can earn a higher return. As they buy more U.S.​ dollars, the exchange rate for the dollar will​ increase, and the dollar will increase in value. There will be an appreciation of the currency making U.S. goods more expensive for foreigners and imports cheaper for U.S. residents. When U.S. interest rates rise as a result of an open market sale by the​ Fed, we expect exports to decrease and imports to​ increase, decreasing net exports. The decrease in net exports will reduce the demand for U.S. goods and lead to a fall in output. Next Question

T/F Government debt is monetized if the debt is essentially paid off by printing money (causing inflation and reducing the value of the debt in real terms)

TRUE

Suppose the Federal Reserve decided that it wanted to offset any adverse effects on output due to a supply shock. What actions could it​ take, and what would happen to the price level if the Fed used monetary policy to fight unemployment in this​ situation?

The Fed could increase the money​ supply, which would also increase the price level.

role of the Federal Reserve Banks

The Fed provides banking services, such as holding bank reserves in its vaults, for commercial banks The Fed conducts monetary policies and targets a certain market interest rate The Fed regulates the banking sector and collects commercial banks' balance sheet data The Fed does NOT: raises taxes to offset increases in the money supply

Milton Friedman and the Great Depression. Milton​ Friedman's views on economic policy were greatly influenced by his interpretation of the Great Depression. He argued that the Great Depression was caused by government mismanagement of the money supply. ​Friedman's interpretation of history led him to advocate which of the following economic policies in times of​ recession?

The government and the Federal Reserve should do​ nothing, as activist policies may do more harm than good.

Which of the following statements is TRUE? The credit default swap increases the downside risk from owning the underlying bond A rise in the interest rate increases the present value of a stock without changing the expected future value of that stock. The rescue of banks that are considered "Too Big To Fail" induces more risky behavior of these banks The spread between the lending rate and the deposit rate is pro-cyclical

The rescue of banks that are considered "Too Big To Fail" induces more risky behavior of these banks

As your annual income increases, the fraction that you pay in income taxes is a higher fraction of every marginal dollar earned, but you don't pay a higher marginal tax rate on the first X dollars earned than does someone who earns only X the whole year 14ab_Ch10_part2_Lecture Video/Quiz

True

If households are rational, forward-looking, and have access to banks, then they should save during economic expansions and borrow (or use their previous savings) during recessions, and the mpc should be close to zero and the expenditure multiplier should be close to 1. 15_Ch10_stabilization_slide3 Lecture Video/Quiz

True

Many of the most important roles of government have nothing to do with the state of the business cycle but instead with the provision of public goods such as infrastructure, education, rule of law, the military, environmental regulation, and trade agreements

True

T/F Fiscal policy has a long-run impact on real interest rates (and I) and therefore on exchange rates (and NX) where monetary policy has no long run impact on real interest rates (shift in M2 is followed by a shift in Md) so monetary policy is long run "neutral"

True

Understanding Japanese Fiscal Policy. ​Japan's finance ministry agreed to income tax cuts to combat a​ decade-long recession in the​ 1990s, but only if national sales taxes were increased several years later. a) Assuming that the economy is currently in a​ recession, as shown in the graph to the​ right, what would you expect to be the​ short-run effect of the income tax​ cuts? b) Which of the following best explains why the Finance Ministry required an increase in sales taxes several years​ later?

a) A decrease in taxes increases​ consumption, which shifts the AD curve​ rightward, increasing prices and increasing output. b) After the economy returns to full​ employment, the lower income tax rate may be inflationary.

a) Tax Increases and Crowding In. Suppose the economy is operating at full employment and the government cuts taxes for consumers. b) In the long​ run, since output is above potential​ output, wages and prices will ______, ​which will cause ______ c) Which of the following best describes what happens to interest rates and investment in the long​ run?

a) A tax cut represents an increase in disposable​ income, which causes AD to​ rise, and thus GDP and the price level rise in the short run. b) rise; Short run AS to shift leftward Since output exceeds full employment​ output, wages and prices will​ rise, causing​ short-run AS to shift leftward. c) Interest rates​ rise, which crowds out investment.

Redlining and discriminatory Federal home loan (mortgage) insurance policy continues to impact economic opportunities for people of color in part because 28_part 1_place_based_policies_monetary - Lecture VideoQuiz

all of these reasons Segregation of people of color into red-lined "high risk" areas impeded small business development and slowed economic growth in those areas the returns to education for poeple of color were lower becasue of locational restrictions, and upward mobility is affected by education People of color had less wealth accumulation prior to the Fair Housing Act (1968) and passed less wealth down onto their descendants

If GDP is ________ potential output, the economy is in a ________ and wages will tend to decrease.

below; recession

An increase in the reserve requirement most likely

decreases the money supply, which leads to increased interest rates and a decrease in GDP.

Inflation and Currency Held Abroad. Suppose inflation in the United States rose to around 8 percent a year;_____ the demand for U.S. currency by foreigners.

increase As the U.S. economy remains strong with low and stable​ inflation, foreigners demand to hold U.S. dollars. If inflation​ rose, the U.S. economy would not be considered as​ safe, and foreigners would hold fewer U.S. dollars. Next Question

The effect of the Chinese​ government's purchase of U.S. dollars in the foreign exchange market with Chinese currency would be to _____ the supply of Chinese currency.

increase When the Chinese government buys U.S. dollars​ (by selling Chinese​ currency), this transaction raises the supply of Chinese currency.

an increase in government spending will _____ interest rates in the long run.

increase in Government spending increases Prices, which increases money demand and interest rates in the long run

Supply shocks

increase the price level and increase unemployment.

Supply Shocks and Policy Choices. Supply shocks are sudden increases in the prices of commodities such as oil or food. These shocks shift the​ short-run aggregate supply curve. For​ example, the increase in oil prices in 2008 will shift the​ short-run aggregate supply curve​ upward, because​ firms' costs have risen and firms must charge higher prices to avoid losing money. During a supply​ shock, the price level _____ and unemployment ​, while during a demand shock​(such as an increase in​investment), the price level _____ and unemployment _____

increases; increases; ​,increase, decrase

The purpose of having the members of the Board of Governors of the Federal Reserve serve fourteen-year terms is to

insulate the governors' policy decisions from the influence of presidential elections and politics.

b. The most successful corporations today like Apple or Google do not purchase as many capital goods for their business compared to companies in the past such as railroads or steel plants. In this​ case, ____ will fall so that there could be insufficient aggregate demand.

investment These companies naturally invest less in capital goods and since they are so​ big, the economy also invests less.

e. Financial regulation has made it more difficult for banks to extend loans. In this​ case, ____ will fall so that there could be insufficient aggregate demand.

investment Banks are making fewer loans to allow firms to invest.

c. Interest rates are close to zero now. In this​ case, ____ will fall so that there could be insufficient aggregate demand.

investment Interest rates cannot fall enough to stimulate investment.

d. Technological progress has reduced the prices of capital equipment. In this​ case, ____ will fall so that there could be insufficient aggregate demand.

investment It takes less money to buy capital​ goods, so there is not as much spending on them.

We are in a banking equilibrium if the fraction of each deposit that the bank holds in reserve 20_ch13_slides2_balance sheets_Lecture Video/Quiz

is also the fraction that depositors plan to spend in the near-term

Can Monetary Policy Prevent Crowding​ Out? Consider this​ quote: ​"In the long​ run, we do not have to worry about increased government spending causing crowding​ out, because the Fed can always increase the money supply to lower interest rates to prevent​ this." this statement is

is erroneous because increases in the money supply do not influence real interest rates in the long run. When the money supply​ increases, interest rates fall in the short run. Higher interest rates are the mechanism through which crowding out of public investment occurs. As investment spending by the public then falls​ (gets crowded​ out), we know that aggregate demand decreases. This process will continue until the economy returns to full employment. Once the economy returns to full​ employment, the decrease in investment spending by the public will exactly match the increase in government spending.​ However, when the economy does return to full​ employment, it will be at a higher interest rate level and lower level of investment spending by the public. If the Fed increased the money supply to lower interest​ rates, this would stimulate aggregate demand and actually raise prices and nominal interest rates in the long​ run, though the real rate of interest does not depend on monetary policy because money is neutral. That​ is, even though the money supply may be higher or​ lower, the price level will be higher or lower also.

The​ short-run aggregate supply curve will shift ___ if the​ economy's actual output is above​ full-employment output

leftward If output is above ​full-employment output,​ short-run aggregate supply will shift leftward as prices rise.

Quantitative Easing (QE) is very much like a regular open market operation (OMO). The main difference is that in the case of QE the Fed buys _________ and in an OMO the Fed buys _______

long term assets; short term assets

increasing Health Spending and Economic Growth. Analyze how the following factors associated with increased spending on health care might affect economic growth. ​a-b. With increased longevity, workers will need to postpone their retirement in order to save more for old age. This will ______ consumption in the short run since saving is increasing, _____ economic growth in the short run ​c-d. Households may reduce their savings in order to spend more on health care. This will ____ investment in the short run _____ economic growth in the short run

reduce; lowering reduce; reducing

Unemployment and Wage Price Changes. If the natural rate of unemployment is 8 percent and the actual rate of unemployment is 5 ​percent, wages and prices will

rise: When the economy is producing above full employment or potential​ output, the unemployment rate will be below the natural rate of unemployment. Firms will find it difficult to hire and retain​ workers, and they need to offer workers more wage. As all firms raise ​wages, the average level of wages in the economy rises. Wages are the largest component of​ firms' costs.​ So, when wages rise​, prices rise​, too.

The chairman of the Federal Reserve Board of Governors: sits on the Federal Open Market Committee. serves a fourteen year term as chairman. is always the president of the Federal Reserve Bank of New York. is appointed by the President and confirmed by the Treasury.

sits on the Federal Open Market Committee.

The demand for money that arises because holding money over short periods is less risky than holding stocks or bonds is called the

speculative demand for money

The States and Balanced Budgets. Unlike the U.S. federal​ government, virtually all states have requirements that they either plan for or maintain a balanced budget. If the national economy experiences a​ recession, 10.2

state budgets go into deficits as tax revenues decline.

Social Security and Medicare are referred to as "entitlement" programs because 14ab_Ch10_part 1_Lecture Video/Quiz

the recipients have legal contracts with the government for particular returns on their payments into these programs

The Trump administration cut the upper marginal corporate income tax rates in December 2017 so that 14ab_Ch10_part2_Lecture Video/Quiz

they are now just a bit above the European average

A tax cut is likely to have a bigger impact on AD if people think the tax cut is permanent than if they think it is temporary 15_Ch10_stabilization_slide3 Lecture Video/Quiz

true

As of December 2017, US corporate tax rates are now very similar to average European tax rates 15_Ch10_stabilization_slide3 Lecture Video/Quiz

true

Ceteris paribus, if US monetary policy is less expansionary than European monetary policy, then the dollar will appreciate and US NX will fall 23_Ch14_monetary policy_and_data_Lecture Video/Quiz

true

Counter-cyclical policies try to stimulate AD during Keynesian recessions and they also reduce AD during expansions in order to raise the money to pay for the (previous or future) AD stimulus 15_Ch10_stabilization_slide3 Lecture Video/Quiz

true

Examples of market failures that we've seen so far in the course include the Keynesian view that coordination failures keep wages from adjusting in short run, which makes recessions last longer. This creates a potential role for a welfare-improving policy 13_Ch10_Intro_Lecture Video/Quiz]

true

If policymakers can agree on the source of a particular market failure, they are more likely to agree on what policy to use. Economists can help policymakers think about how to identify sources of market failures and to evaluate the effectiveness of alter 13_Ch10_Intro_Lecture Video/Quiz]

true

Medicare is a federally-subsidized health insurance program that elderly American can buy for themselves; Medicaid is health insurance for the poor 14ab_Ch10_part 1_Lecture Video/Quiz

true

Micro review: If there is a positive externality then the market outcome is less than the efficient outcome because market participants do not "internalize" the external benefit to society. Education subsidies reduce the cost of education, which gives mar 13_Ch10_Intro_Lecture Video/Quiz]

true

Normally government borrowing falls during economic expansions, as governments usually raise marginal income tax rates when people can most afford it and as revenue collection automatically increases as GDP goes up. This helps pay for borrowing that norma 14ab_Ch10_part2_Lecture Video/Quiz

true

Government Spending Multiplier​ =

ΔY/ΔG

Rates on​ Two-Year Bonds and​ One-Year Bonds. Suppose the interest rate on a​ two-year bond was higher than the interest rate on a​ one-year bond. The market must believe that next year​ one-year interest rates will

​The market must believe that next year​ one-year interest rates will Long-term interest rates are an average of the current​ short-term interest rate and expected future​ short-term rates. If the interest rate on a​ two-year bond was higher then the interest rate on a​ one-year bond, the interest rate on next​ year's one-year bond must exceed the interest rate on this​ year's one-year bond.

Debit Cards as a Fiscal Stimulus. Here is one unusual fiscal​ policy: The government would issue​ time-dated debit cards to each person that had to be spent on goods and services produced only by U.S. firms within a fixed period​ (say, three​ months) or become worthless. Suppose the government was considering whether to issue​ $400 in​ time-dated debit cards to each household or give each household​ $400 in cash instead. 2) Suppose a family had large credit card​ debt, which it wished to reduce. Of the two​ plans, the family would prefer

​Time-dated debit cards would have greater immediate impact on consumption spending since they had to be spent within a specific period of time and the higher the value of the​ MPC, the greater the total impact on spending and income. 2) the cash payments​ program, since cash could be used to pay off some of the credit card debt.