unit 4 monetary policy
• What is NOT affected by decisions of the Federal Open Market Committee?
Reserve requirements are set by the Board of Governors of the Federal Reserve and not the Federal Open Market Committee. The FOMC sets interest rates, which affect stock prices (indirectly) and bond prices.
• The fact that money "enables people to transfer purchasing power from the present to the future" refers to the ______ function of money.
Store of value refers to the fact that money will hold its value from day to day and even year to year. Excluding the effect of inflation, moneyshould hold its value as long as it is used as money.
• When the Federal Reserve lowers interest rates, hoping to jump-start the employment market, what does it hope it will accomplish with that monetary policy action?
That businesses will begin increasing investments, which in turn, will cause a need for more employees. When the Federal Reserve lowers interest rates, they do this to jump start business investments, and in turn, the increased business will increase the need for workers.
• The Consumer Price Index (CPI) measures
The average of the prices paid by urban consumers for a fixed market basket of goods and services is what determines the Consumer Price Index. The CPI uses the CPI market basket, which are the goods and services that are traced from year to year, measuring the fluctuation in prices.
• The growth rate in the fourth quarter of 2010 was 3.1%. What was the growth rate in the first quarter of 2011?
The graph shows a growth rate of 1.9% in the first quarter of 2011. Note that the bar on the extreme right-hand side of the graph is rising, denoting an increase in GDP.
• How does a monetary policy of low interest rates affect consumers?
A monetary policy of low interest rates MIGHT impact consumers because it lowers savings rates. A lower interest rate results in a smaller returnon savings and a boost in consumer spending. One concern of extended periods of low interest rates is inflation, not deflation.
In the business cycle, what always follows immediately after a contraction?
A trough always immediately follows a contraction. A recession may exist with a contraction, in that it lasts at least 2 quarters.
• Which of these images BEST represents a location that would feel the greatest impact of seasonal unemployment?
Beaches often feel the temporary sting of seasonal unemployment. This type of joblessness occurs- not surprisingly- because of changes in a season, either due to weather or some activity that is only associated with a specific time each year. Seasonal unemployment is not as huge of a concern to economists as the other types of unemployment.
• What would be the appropriate monetary policy during a period of low inflation and steady GDP growth?
Do nothing is the appropriate Fed action in this situation. The economy is good: inflation is low and the GDP is growing steady.
• One reason GDP (gross domestic product) might NOT be an accurate indicator of the health of a country's economy is that
GDP relies on measuring spending, much of which (gambling, etc.) is not really productive. This is a common shortcoming of GDP as a measure. Money spent in a casino is treated just like money spent building roads or producing durable manufactured goods.
• What would be reasonable monetary policy if the economy was in a recession?
Monetary policy influences the money supply or the money flow in the economy. When there is a recession, economic growth has declined. To increase the money supply would increase the available funds for spending and investment, which in turn spurs new production.
