Macro Ch 15 part 2
Suppose the equilibrium real federal funds rate is 3 percent, the target rate of inflation is 3 percent, the current inflation rate is 1 percent, and real GDP is 8 percent below potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals...
-1%
Suppose the equilibrium real federal funds rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals...
13%
Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals...
8%
To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, ________, to sell bonds to investors and use the funds to purchase mortgages from banks.
Fannie Mae and Freddie Mac
In 2008, the Treasury and Federal Reserve took several actions in response to the deepening financial crisis. One action was the Treasury's move to have the federal government take control of...
Fannie Mar and Freddie Mac
The leader of the monetarist school and major proponent of a monetary growth rule was...
Milton Friedman
Between September 2007 and March 2008 there was a substantial reduction in the demand for housing. What action did the Fed take in response to the reduction in the demand for housing?
The federal reserve cut the federal funds rate seven times
In October 2008, Congress passed the ________, under which the Treasury provided funds to banks in exchange for stock.
Troubled Assest Relief Program (TARP)
The Taylor rule accurately predicted the changes in the federal funds target during the period...
When Alen Greenspan was the chairman of the Federal Reserve Board
A financial asset is considered ________ if it can be sold in a secondary market.
a security
The argument advanced by Milton Friedman for adopting a monetary growth rule is that...
active monetary policy potentially destabilize the economy
Most economists believe that the best monetary policy target is ...
an interest rate
If the Federal Reserve targets the interest rate and the money demand curve shifts to the left, then the Fed...
can maintain the interest rate target, but at a lower quantity of the money supply
Although the Federal Reserve had traditionally made discount loans only to ________, in response to the financial crisis in 2008 the Fed made primary dealers eligible for discount loans as well.
commercial banks
Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the federal funds target rate equals the...
current inflation rate plus the real equilibrium federal funds rate
When housing prices fall, as they did beginning in 2006 following the housing market bubble, consumption spending on furniture, appliances, and home improvements ________ as many households found it ________ to borrow against the value of their homes.
declined; harder
From an initial longminus−run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than longminus−run aggregate supply, then the Federal Reserve would most likely...
decrease interest rates
In the countries that have adopted inflation targeting, the inflation rate has typically
decreased
The supporters of a monetary growth rule believe that active monetary policy...
destabilizes the economy, increasing the number of recessions and their severity
The Federal Reserve cut the federal funds rate seven times between September 2007 and March 2008. What event led the Fed to make these reductions in the federal funds rate?
during this period there was a substantial reduction in the demand for housing
When housing prices ________, as they did beginning in 2006 following the housing market bubble, consumption spending on furniture, appliances, and home improvements decline as many households find it ________ to borrow against the value of their homes.
fall; harder
Despite saving Lehman Brothers from failing, the Fed and the Treasury decided to allow Bear Stearns to go bankrupt, which it did in September, 2008.
false
The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association were established by Congress in order to regulate banks that buy and sell mortgage-backed securities.
false
The Federal Reserve's performance in the midminus−tominus−late 1980s, 1990s, and early 2000s has received high marks from economists because of inflation targeting....
false
The relationship between GDP and the money supply has gotten stronger since the 1980s.
false
The Taylor rule links the Federal Reserve's target for the...
federal funds rate to economic variables
The Taylor rule helps explain the relationship between the Fed's ________ and ________.
federal funds target; economic conditions
When housing prices ________ as they did beginning in 2006 following the housing market bubble, most banks and other lenders tightened the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages.
fell;harder
The core personal consumption expenditures price index excludes...
food and energy prices
The Fed uses a "core" price index, one that excludes food and energy prices to measure inflation. It does so because...
food and energy prices have wide swings that are not related to the causes of general inflation
In October 2008, Congress passed the Troubled Asset Relief Program (TARP), under which the Treasury provided ________ to banks in exchange for ________.
funds; stocks
Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
higher; higher
An advantage of the personal consumption expenditures price index (PCE) over the Consumer Price Index (CPI) as a measure of inflation is that the PCE...
includes the prices of more consumers goods and services
From an initial longminus−run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly faster than longminus−run aggregate supply, then the Federal Reserve would most likely...
increase interest rates
According to the Taylor rule, the Fed should set the target for the federal funds rate equal to the sum of the equilibrium real federal funds rate, the current inflation rate, oneminus−half times the ________, and oneminus−half times the ________.
inflation gap; output gap
Suppose that the Federal Reserve Open Market Committee adheres to the ideas expressed by ________________. If the economy moves into a recession, this Fed would recommend that the federal funds target rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation....
inflation targeting
Which of the following is not an argument against inflation targeting?
inflation targeting makes monetary policy ineffective because the targets are publicly announced
Which of the following statements about inflation targeting is true?
inflation targeting would make it easier for households and firms to form accurate expectations of future inflation, improving their planning and the efficiency of the economy
By the 2000s, an important change in the mortgage market had occurred when ________ became significant participants in the secondary market for mortgages...
investment banks
A financial asset is considered a security if...
it can be sold in a secondary market
The Federal Reserve's implicit policy goal for the past 20 years has been to ...
keep inflation low and stable in the long run
The Taylor rule predicted a federal funds rate which was ________ that set when Paul Volcker was chairman of the Fed, and a rate which was ________ that set when Arthur Burns chaired the Fed.
less than; greater than
Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
lower; lower
Inflation targeting refers to conducting ________ policy so as to commit the central bank to achieving a ________.
monetary; publicly announced level of inflation
The Federal Reserve cannot target both the money supply and the interest rate because it does not control ...
money demand
In 2008, the Treasury and Federal Reserve took several actions in response to the deepening financial crisis. One action was the creation of the Term Securities Lending Facility, under which the Fed will loan up to $200 billion of treasury securities in exchange for...
mortgage-backed securities
By the 2000s, an important market change occurred when investment banks became significant participants in the secondary market for...
mortgages
The consumer price index (CPI), the personal consumption expenditures price index (PCE), and the core PCE have over the last 15 years ...
moved roughly together with the core PCE being the most stable
With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would...
not change
If the amount you owe on your house is less than the price of the house, you have...
positive equity in your house
Although the Federal Reserve had traditionally made discount loans only to commercial banks, in response to to the financial crisis in 2008 the Fed made ________ eligible for discount loans as well.
primary dealers
Firms that participate in regular open market transactions with the Federal Reserve are called...
primary dealers
Which of the following explains why mortgages weren't considered securities prior to 1970?
prior to 1970, mortgages were rarely resold in the secondary market
Prior to 1970, mortgages were ________ resold in the secondary market.
rarely
Under the monetary growth rule proposed by the monetarists, the money supply would grow each year at a constant rate equal to the longminus−run rate of growth of...
real GDP
To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac...
sell bonds to investors and use the funds to purchase mortgages from banks
By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes...
sub-prime; "Alt-A"
The Federal Reserve does not target both the money supply and an interest rate because...
the Fed cannot achieve a target for both the money supply and an interest rate at the same time
In 2008, the Treasury and Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing. Which of the following is one reason why these measures were taken?
the bankruptcy of a large financial firm would force the firm to sell its holdings of securities, which could cause the other firms that hold these securities to also fail
Inflation targeting is a framework for carrying out monetary policy whereby...
the central bank commits to achieving a publicly announced level of inflation
In recent years, a monetary growth rule has fallen out of favor because...
the close relationship between movements in M1 and movements in real GDP has become weaker
Why doesn't the Fed have both a money supply target and an interest rate target?
the fed does not control money demand
The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is one of the ways the Fed responded?
the fed led investment banks treasury securities in exchange for mortgage-backed securities
The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is not one of the ways the Fed responded?
the fed lowered the required reserve ratio on demand deposit accounts in order to increase the amount of bank reserves
Firms that participate in regular open market transactions with ________ are called primary dealers.
the federal reserve
The larger the fraction of an investment financed by borrowing, ...
the greater the potential return on potential loss on that investment
The Fed's preferred measure of inflation is...
the index of leading economic indicators
Monetarists think that the Fed should use _________ as a target when conducting monetary policy....
the money supply
A monetary growth rule means that...
the money supply should grow at a constant rate
Most of the pressure for a monetary growth rule has disappeared because since 1980...
the relationship between movements in the money supply and movements in real GDP level have become much weaker
The smaller the fraction of an investment financed by borrowing, ...
the smaller the potential return and potential loss on that investment
While many analysts defended the actions taken by the Fed and the Treasury to respond to the financial crisis in 2008, others were critical of these actions. The critics were concerned that by not allowing large firms to fail,...
there is an increase likelihood that other firms will engage in risky behavior in the future with the expectation that they will also not be allowed to fail
When housing prices fell as they did beginning in 2006 following the housing market bubble, most banks and other lenders ________ the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages.
tightened; harder
A borrower defaults on a loan when he stops making payments on the loan.
true
An argument in favor of the Federal Reserve adopting inflation targeting is that in the long run, the Fed can have an impact on inflation but not on real GDP...
true
By the 2000s, investment banks had become significant participants in the secondary market for mortgages.
true
Expansionary monetary policy enacted during a recession will cause the inflation rate to increase.
true
In March 2008, the Fed announced that primary dealers would be eligible to receive discount loans.
true
Inflation targeting has been adopted by the central banks of several countries including the European Central Bank...
true
Inflation targeting has typically been accompanied by lower inflation...
true
In reality, the Fed is unable to use monetary policy to keep real GDP exactly at its potential level.
true
The Fed can use contractionary monetary policy in an attempt to keep inflation from increasing.
true
The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand.
true
The Fed has adopted an interest rate target for most of the time since World War II.
true
The Federal Reserve could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply...
true
The dynamic aggregate demand and aggregate supply model accounts for the price level rising every year.
true
With the Troubled Asset Relief Program (TARP), the Treasury provided funds to banks in exchange for stock.
true
Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is greater than potential GDP, then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate.
will be greater than
Using the Taylor rule, if the current inflation rate exceeds the target inflation rate and real GDP exceeds potential GDP, then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate....
will be greater than
Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is less than potential GDP, then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate....
will be less than
By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to subminus−prime borrowers ________ and "Altminus−A" borrowers ________.
with flawed credit histories; who did not document their incomes
If the amount you owe on your house is greater than the price of the house,
you have negative equity in your house
