ECON 2101 Chapter 15
Which of the following will lead to a decrease in the equilibrium interest rate in the economy?
A decrease in GDP.
Contractionary monetary policy on the part of the Fed results in
A decrease in the money supply, an increase in interest rates, and a decrease in GDP.
An increase in the interest rate causes
A movement up along the money demand curve.
As the interest rate increases,
Consumption, investment, and net exports decrease; aggregate demand decreases.
Monetary policy refers to the actions the
Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives.
Expansionary monetary policy refers to the ________ to increase real GDP.
Federal Reserve's increasing the money supply and decreasing interest rates.
The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of __________, it also can achieve the goal of ________________ simultaneously.
High Employment; Economic Growth
Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to
Increase.
An increase in the interest rate
Increases the opportunity cost of holding money.
John Maynard Keynes is said to have remarked that using an expansionary monetary policy to pull an economy out of a deep recession can be like "pushing on a string."
Increasing reserves and lowering interest rates may not stimulate economic activity if banks don't lend and businesses don't borrow.
Which of the following is a monetary policy target used by the Fed?
Interest rate.
The federal funds rate
Is the rate that banks charge each other for short-term loans of excess reserves.
The Fed uses policy targets of interest rate and/or money supply because
It can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.
What do economists mean by the demand for money?
It is the amount money-currency and checking account deposits-that individuals hold.
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 credit histories; a higher interest rate.
Why is the Fed sometimes said to have a "dual mandate"? The Fed is said to have a" dual mandate" because
Maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946.
What is the advantage of holding money?
Money can be used to buy goods, services, or financial assets.
What is the disadvantage of holding money?
Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.
The Federal Reserve's four goals of monetary policy are
Price stability, high employment, economic growth, and stability of financial markets and institutions.
Which one of the following is not one of the monetary policy goals of the Fed?
Reduce income inequality.
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 the banks.
An increase in interest rates affects aggregate demand by
Shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level.
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.
What are the Fed's main monetary policy targets?
The money supply and interest rates.
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.
What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?
"Fannie Mae" and "Freddie Mac"
