Economics final

What two institutions did Congress create in order to increase the availability of mortgages in a secondary​ market?

"Fannie Mae" & "Freddie Mac"

Suppose the reserve requirement is 5%. What is the effect on the total checkable deposits in the economy if bank reserves increase by $40 billion?

$800 billion increase. (40*.05=2.0, 2*40=80.0)

What is true with respect to hyperinflation?

-in the presence of hyperinflation, firms and households avoid holding money -it can be hundreds - even thousands - of percentage points per year -it is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP

By trading, countries are able to consume more than they could without trade. This outcome is possible because

-inefficiencies in resource allocation are reduced -shifting production to the more efficient country - the one with the comparative advantage - increases total production -world production of both goods increases after trade

How do investment banks differ from commercial banks?

-investment banks do not take deposits -investment banks generally do not lend to households

The World Trade Organization (WTO)

-replaced the General Agreement on Tariffs & Trade (GATT) in January 1995 -generally aids in negotiating trade agreements that include not only goods but also services & intellectual property -is an international organization that oversees international trade agreements

What are the gains to be had from simplifying the tax code?

-resources from the tax preparation industry freed up for other endeavors -increased efficiency of households and firms -greater clarity of the decisions made by households and firms

Why do some people oppose the World Trade Organization (WTO)?

-some opponents desire to erect trade barriers to protect domestic firms from foreign competition -some opponents are specifically against the globalization process that began in the 1980s and became widespread in the 1990s -some opponents of the WTO support globalization principle but believe that the WTO favors the interests of the high-income countries at the expense of the low-income countries

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates?

-the value of a dollar -business investment projects -consumption of durable goods

One of the board members is appointed to a ___ year, renewable term as chairman

4

The Federal Reserve Bank's Board of Governors consists of ___ members appointed by the President of the US to 14-year, non-renewable terms

7

The net export effect of contractionary monetary policy predicts that a country's

exports decrease as the money supply contracts

The multiplier effect is only a consideration for increases in government purchases.

false

What is the difference between federal government purchases (spending) & federal government expenditures?

government purchases are included in government expenditures

The Fed changes the discount rate as a part of its policy to reach all of the following objectives except

high unemployment

credit cards are not

included in either M1 or M2

The _________________________ is considered the most relevant interest rate when conducting monetary policy

short-term nominal interest rate

The higher the tax rate, the ________ the multiplier effect

smaller

Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge is called

supply-side economics

fiat money

the US dollar can be best described as:

The Fed targets

the federal funds rate

Which of the following is not a viable monetary policy target for the Fed?

the money demand

According to the quantity theory of money, inflation results from which of the following?

the money grows faster than the real GDP

Who is harmed when individual nations move from autarky to free trade?

the owners of the firms that went out of business

The primary difference between a quota and a voluntary export restraint (VER) is that

the quota is unlaterally imposed by one nation on the other while the VER is the result of negotiations between nations

One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal

the rate if inflation should be low, such as 1%-3% and should be fairly consistent

When is it considered "good policy" for the government to run a budget deficit?

when borrowing is used for long-lived capital goods

According to the Taylor Rule, what is the federal funds target rate under the following conditions?

-equilibrium real federal funds rate= 2% -target rate of inflation= 2% -current inflation rate equals 1% -real GDP is 1% below potential real GDP -the federal funds target rate equals 2%

Among the main sources of comparative advantage are the following

-climate and natural resources, relative abundance of labor & capital, technology, and external economies

Why did the Fed help JP Morgan Chase buy Bear​ Stearns?

-commercial banks would be reluctant to lend to investment banks -failure of Bear Steams would lead to a larger investment bank failure

Increased government debt can lead to higher interest rates and, as a result, crowding out of private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long so that government debt poses less of a problem to the economy?

-debt spending on highways and ports -debt spending on research and development -debt spending on education

How does budget deficit act as a automatic stabilizer & reduce the severity of a recession

-during recessions, tax obligations fall due to falling wages and profits -consumers spend more than they would in the absence of social insurance programs, like unemployment -transfer payments to households increase

The US is divided into ___ Federal Reserve Districts

12

Is the real world deposit multiplier greater than, less than, or equal to the simple deposit multiplier?

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier

M1 definition of the money supply

checking account deposits make up the majority

What is inflation targeting?

Committing the central bank to achieve an announced level of inflation

As of 1993, the Fed sets targets for which of the following in order to achieve price stability and high employment

Federal funds rate

In addition to the Federal Reserve Bank, what other economic actors influence the money supply?

Households, firms and banks

What is true with respect to the Irving Fishers quantity equation, M*V=P*Y?

V= average number of times a dollar is spent on goods and services P= the GDP deflator M= M1 definition of the money supply V= P*Y/M

One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase

current income

After 9/11 the federal government increased military spending on wars in Iraq and Afganistan. Is this increase in spending considered fiscal policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives

Nobel Iauredte Milton Friedman & 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 & that it should adopt the monetary growth rule

Year | potential GDP | real GDP | price level 2012 | $14.7 trillion | $14.7 trill. | 110 2013 | $15.3 trillion | $15.4 trill. | 114 What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? If the Fed's policy is successful, what is the effect on the following indicators?

The Fed will pursue a contractionary monetary poliocy Actual real GDP: decreases Potential real GDP: doesn't change Price level: decreases Unemployment: increases

monetary policy is defined as

The actions the Federal Reserve takes to manage the money supply and interest rates.

the basic structure of the Federal Reserve Bank

There are 12 district banks, a Board of Governors and a Federal Open Market Committee

Does government spending ever reduce private​ spending?

Yes, due to crowding out

In a fractional reserve banking system what is the difference between a "bank run" and a "panic run"?

a bank run involves one bank, a bank panic involves several banks

The indirect effect of an increase in the money supply works through

a decrease in the interest rate increasing investment and consumption

When a central bank intervenes into the foreign exchange market to set a countries exchange rate over long periods of time, is called

a fixed exchange rate

What is a function of the Federal Reserve System

acting as a lender of last resort to commercial banks

The (FOMC) Federal Open Market Committe

all of the above

Imports

are goods and services bought domestically but produced in other countries

Exports

are goods and services produced domestically but sold to other countries

Tariffs

are taxes imposed by a government on imports of a good into a country

Which is true?

both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand

When the FOMC wants to increase the money supply, it ________ US Treasury securities. If it wants to decrease the money supply, it _________ US Treasury securities.

buys; sells

An initial increase in a bank's reserves will increase checkable deposits

by an amount greater than the increase in reserves

Contractionary monetary policy

causes the interest rate to increase

M2 definition of the money supply

includes: M1, savings accounts, small time deposits and money markets

In the graph, what most likely caused the shift in the money demand curve from AD to AD1?

increase in real GDP or increase in the price level

Which of the following is a monetary policy tool used by the Federal Reserve Bank?

increasing the reserve requirement from 10% to 12.5%, decreasing the rate at which banks can borrow money from the Federal Reserve, & buying $500 million worth of government securities such as treasury bills

Autarky

is a situation in which a country does not trade with other countries

Dumping

is selling a product for a price below its cost of production

Comparative advantage

is the ability of an individual, a firm, or a country to produce a good of service at a lower opportunity cost than competitors may change as time passes & circumstances change

The federal funds rate

is the rate that banks charge each other for short-term loans of excessive reserves

The terms of trade

is the ratio at which a country can trade its exports for imports from other countries

Protectionism

is the use of trade barriers to shield domestic firms from foreign competition. It is usually justified on the basis of several arguments which include: -saving jobs -protecting infant industries -protecting national security

One effect of tariffs & quotas

is to cost jobs outside the industries immediately affected.

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

As a result of crowding out in the short run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending

Not a policy of monetary policy

low prices

Functions of money

medium of exchange, unit of account, store of value, standard of deffered payment

We do not see complete specialization in the real world because

not all goods & services are traded internationally, production of most goods involves increasing opportunity costs & tastes for products differ

If the Fed is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. This is an example of

procyclical policy

Use of money

reduces the transaction cost of exchange, allows for greater specialization, eliminates the double coincidence of wants

What event caused Congress to begin seriously looking at setting up the Federal Reserve System

severe banking crisis at the end of the 19th century and early 20th century