Econ 1A ch 24-26
The introduction of Fannie Mae and Freddie Mac into the mortgage-backed securities market by the government
All of the above.
The (FOMC) Federal Open Market Committee
All of the above.
Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?
The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule.
The Fed uses policy targets of interest rate and/or money supply because Part 4
it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level. Your answer is correct.
The largest and fastest-growing category of federal expenditures is
transfer payments.
If the government increases expenditure without raising taxes, this will
A and B only..... A. increase the budget deficit and require the government to borrow additional funds. B. cause the interest rate to increase, thereby, reducing private investment and crowding out the private sector.
Suppose a political candidate hired you to develop two arguments in favor of a flat tax. Part 2 Consider the following list of arguments about changing to a flat tax: A. There would be a reduction in paperwork and the compliance cost of the tax system. B. The complexities in the current tax code allow the government to pursue other policy goals. C. A change in the tax code would result in a more unequal distribution of income because the marginal tax rate on high-income taxpayers would be reduced. D. There are potential increases in labor supply, savings, and investment from a lower marginal tax rate. Part 3 Which two out of the above list of arguments would you advance in favor of a flat tax?
A and D
When the Federal Reserve increases the discount rate as a part of a contractionary monetary policy, there is:
A decrease in the money supply and an increase in the interest rate.
Which of the following is true with respect to Irving Fisher's quantity equation, M×V=P×Y?
All of the above
Which of the following is a monetary policy response to the economic recession of 2007-2009 and the accompanying financial crisis?
All of the above were responses.
How does a budget deficitLOADING... act as an automatic stabilizer and reduce the severity of a recession?
All of the above.
Which of the following are categories of federal government expenditures?
All of the above.
Which of the following is a monetary policyLOADING... tool used by the Federal Reserve Bank?
All of the above.
Consider the same list of arguments about changing to a flat tax. Part 5 Which two out of the above list of arguments would you advance against a flat tax?
B and C
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation.
What is meant by crowding out?
Crowding out is a decline in private expenditures as a result of increases in government purchases.
Consider the following statement: "In the dynamic AD and AS model, contractionary monetary policy causes the price level to fall." The statement is Part 2
False. Contractionary policy causes the price level to rise by less than it would have without the policy.
For more than 20 years, the Fed has used the federal funds rate as its monetary policy target. It has not targeted money supply at the same time because the
Fed cannot target both at the same time: It has to choose between targeting an interest rate and targeting the money supply.
What is fiscal policy?
Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
Households, firms, and banks
Which of the following best describes the difference between crowding out in the short run and in the long run?
In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures. Your answer is correct.
What changes should they make if they decide a contractionary fiscal policy is necessary? Part 4
In this case, Congress and the president should enact policies that decrease government spending and increase taxes.
If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?
In this case, Congress and the president should enact policies that increase government spending and decrease taxes.
Which of the following is a monetary policy target used by the Fed?
Interest rate.
Recall that "securitization" is the process of turning a loan, such as a mortgage, into a bond that can be bought and sold in secondary markets. An article in the Economist notes: That securitization caused more subprime mortgages to be written is not in doubt. By offering access to a much deeper pool of capital, securitization helped to bring down the cost of mortgages and made home-ownership more affordable for borrowers with poor credit histories. Source: "Ruptured Credit," Economist, May 15, 2008. What is a "subprime mortgage," and would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit history?
Loans granted to borrowers with flawed credithistories; a higher interest rate.
What are the largest asset and the largest liability of a typical bank?
Loans are the largest asset and deposits are the largest liability of a typical bank.
Which of the following is NOT a monetary policyLOADING... goal of the Federal Reserve bank (the Fed)?
Low prices
The M2 definition of the money supply includes Part 2
M1, savings accounts, small time deposits, and money markets.
Which can be changed more quickly: monetary policy or fiscal policy?
Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.
Why would securitization give mortgage borrowers access to a deeper pool of capital?
Since banks could resell mortgages to investors, they had access to more funds than just their own deposits.
Which of the following best explains how the Federal Reserve acts to help prevent banking panics?
The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors.
What is the difference between the federal budget deficit and federal government debt? Part 2
The federal budget deficit is the year-to-year short fall in tax revenues relative to government spending (T < G + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.
Who is responsible for fiscal policy?
The federal government controls fiscal policy.
The Federal Reserve has multiple economic goals for monetary policy to achieve, However, it can be difficult to manage all of the goals at once. Which of the following is not true regarding the multiple goals of the Fed?
The goal of financial market stability means that the Fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money.
According to the quantity theory of moneyLOADING..., inflation results from which of the following? Part 2
The money supply grows faster than real GDP.
Which of the following are examples of discretionary fiscal policy? (Check all that apply.)
The president and Congress reduce tax rates to increase the amount of investment spending. This is the correct answer. The government provides stimulus funds to repair roads and bridges to increase spending in the economy. Your answer is correct. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate.
Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending?
Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending.
How do the banks "create money"?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase?
Yes, because fiscal policy and monetary policy are separate things.
In 2015, Richard Fuld, the last CEO of Lehman Brothers, gave a talk in which according to an article in the Wall Street Journal, "He outlined what he called the 'perfect storm' of events that led to the financial crisis, saying 'it all started with the government' and policies that subsidized cheap loans for people to buy homes in order to help them chase the American dream." Source: Maureen Farrell, "Lehman's Fuld Says It Wasn't His Fault," Wall Street Journal, May 28, 2015. Part 2 The events that led to the financial crisis include
a burst in a housing bubble in 2006 which led to mortgage defaults, and a disruption of the financial system resulting from the creation of complex packagings of mortgages.
What is a banking panic?
a situation in which many banks experience runs at the same time
The use of money
all of the above... eliminates the double coincidence of wants. allows for greater specialization. reduces the transaction costs of exchange.
When actual GDP is below potential GDP the budget deficit increases because of:
an increase in transfer payments and a decrease in tax revenues.
excess reserves
are reserves banks keep above the legal requirement.
Government spending and taxes that increase or decrease without any actions taken by the government are referred to as
automatic stabilizers.
In the securitization process,
banks grant loans to households and bundle the loans into securities that are then sold to investors.
Reserve requirements are changed infrequently because
banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement.
The most important role of the Federal Reserve in today's U.S. economy is
controlling the money supply to pursue economic objectives.
Look carefully at the following list. Part 2 a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The traveler's check that you have left over from a trip. e. Your Citibank Platinum MasterCard. Part 3 Which of the things above are NOT included in the M1LOADING... definition of the money supply?
c & e
Congress passed legislation to create the Federal Reserve System in 1913 in order to
end the instability created by bank panics by acting as a lender of last resort.
Evidence shows that the quantity equation is correct over the long run, which implies that the
growth rate of the money supply determines the rate of inflation.
The Federal Reserve Bank of New York is always a voting member of the FOMC because
it carries out the policy directives of the FOMC.
The federal government's day-to-day activities include running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up
less than 10 percent of federal government expenditures.
Which of the following would be the least desirable candidate to be a good medium of exchange?
milk
Consider the following statement: "Real GDP is currently $20.7 trillion, and potential real GDP is $20.4 trillion. If Congress and the president would decrease government purchases by $300 billion or increase taxes by $300 billion, the economy could be brought to equilibrium at potential GDP." Part 2 If government purchases were to decrease by $300 billion or if taxes were increased by $300 billion, the equilibrium level of real GDP would decrease by...... Therefore, the statement above is incorrect
more than $300 billion..... statement incorrect
Money serves as a standard of deferred payment when
payments agreed to today but made in the future are in terms of money.
Money serves as a unit of account when
prices of goods and services are stated in terms of money.
Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply?
reserve requirements
An asset would be usable as a medium of exchange for all of the following reasons except:
the asset should be a commodity that has intrinsic value
When the Federal Reserve sells Treasury securities in the open market,
the buyers of these securities pay for them with checks and bank reserves fall.
Government policies that could have been said to have been subsidizing cheap loans included
the creation of a secondary mortgage market through Fannie Mae and Freddie Mac, and the low interest rates following the 2001 recession.
The federal funds rate is
the interest rate that banks charge each other for overnight loans
When the Federal Reserve purchases Treasury securities in the open market,
the sellers of such securities deposit the funds in their banks and bank reserves increase.
It would seem that both households and businesses would benefit if the federal income tax were simpler and tax forms were easier to fill out. Part 2 However, tax laws have become increasingly complicated because
the tax laws are used to encourage certain activities and discourage others
The national debt is best measured as
the total value of U.S. Treasury securities outstanding.
An article in the Wall Street Journal in 2019 observed, "It has been a decade since bitcoin was born, yet consumers hardly use it—or the hundreds of other cryptocurrencies—to pay for things." Source: AnnaMaria Andriotis, Peter Rudegeair, and Liz Hoffman, "Facebook's New Cryptocurrency, Libra, Gets Big Backers," Wall Street Journal, June 13, 2019. All of the following may help explain the slow adoption of cryptocurrencies except
the vast majority of consumers may not care that cryptocurrencies provide no record of their transactions.
The average number of times each dollar in the money supply is used to purchase goods and services is called
the velocity of money.
What advantages might using cryptocurrencies have over buying things with cash, a check, or a credit card? What would need to happen for those advantages to be sufficient to cause people to switch to cryptocurrencies from other means of payment? One advantage of using cryptocurrencies to buy and sell goods and services is that
there is no permanent record of the transaction, but they are unlikely to be widely used unless their values in terms of government issued money become more stable.
If the Fed believes the inflation rate is about to increase, it should
use a contractionary monetary policy to increase the interest rate and shift AD to the left.
If the Fed believes the economy is about to fall into recession, it should
use an expansionary monetary policy to lower the interest rate and shift AD to the right.
Additionally, the federal funds rate is
very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.
