Macro Ch 15 part 2

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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


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