Macroeconomics Ch 15 part 2

Arrange the events that are caused by an expansionary monetary policy in the order they occur, with the first event at the top.

1. Interest rates will fall 2. Investment spending will rise 3. Aggregate demand will rise 4. Real GDP and the price level will rise

In most cases, how long is the expected operational lag when the Fed makes changes in interest rates?

3-6 months

Which best describes the Fed's "ample reserves regime"?

A high-liquidity policy

What was Federal Reserve's monetary policy called ZIRP?

A monetary policy in which the Fed set nominal interest rates at or near 0% in order to stimulate the economy

Which of the following statements best explains liquidity trap?

Adding more liquidity to banks has no effects on the economy.

Which of the following are lags facing fiscal policy?

Administrative lag Recognition lag Operational lag

Investment spending is one of the determinants of what?

Aggregate demand

___ monetary policy addresses the problem of unemployment and recession, while ___ monetary policy deals with the problem of inflation. (Enter one word per blank.)

Blank 1: Expansionary, Loose, or Easy Blank 2: restrictive, contractionary, or tight

___ policy is hindered by three delays, called recognition, administrative, and operational lags.

Blank 1: Fiscal

___ policy has become the dominant component of U.S. national stabilization policy.

Blank 1: Monetary

___ policy may be highly effective in slowing expansions and controlling inflation but less reliable in pushing the economy from a severe recession.

Blank 1: Monetary

___ monetary policy will increase the interest rate in order to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases.

Blank 1: Restrictive, Contractionary, or Tight

The ___ Rule assumes that the Fed has a 2% "target rate of inflation" that it is willing to tolerate.

Blank 1: Taylor

Monetary policy faces a recognition lag and an operational lag, but avoids the (use only one word) lag that hinders fiscal policy.

Blank 1: administrative

Investment spending is one of the determinants of ___ demand.

Blank 1: aggregate

Investment spending plus consumption spending, net exports, and government spending yields ___ demand.

Blank 1: aggregate or total

The intentions of the Fed when it pursues an expansionary monetary policy and creates excess reserves can be frustrated by businesses that do not want to ___.

Blank 1: borrow

Economists say that monetary policy may suffer from ___ asymmetry.

Blank 1: cyclical

Issuing negative forward guidance, raising the effective federal funds rate, raising IORB and ON RRP rates, and selling government bonds as part of QT are all actions the Fed may take to the money supply.

Blank 1: decrease, lower, drop, or shrink

The greater the level of investment, the farther to the right lies the aggregate ___ curve.

Blank 1: demand

The ___ interest rate is the rate at which the amount of money demanded and the amount supplied are equal.

Blank 1: equilibrium

The Fed will enact restrictive monetary policy when aggregate demand is ___ in relation to the economy's full-employment level of real output.

Blank 1: excessive, high, or exceeds

Under ___ monetary policy, excess reserves increase, federal funds rate falls, money supply rises, interest rates fall, and real GDP rises.

Blank 1: expansionary, easy, or loose

A(n) ___ in the money supply will lower the interest rate, increasing investment, aggregate demand, and equilibrium GDP.

Blank 1: increase or rise

Issuing positive forward guidance, lowering the effective federal funds rate, lowering the IORB and ON RRP rates, and purchasing government bonds as part of QE are all actions the Fed may take to ___ the money supply.

Blank 1: increase, raise, up, or boost

A rule of thumb suggested by economist John Taylor builds on the belief that central banks are willing to tolerate a small positive rate of ___ if doing so will help the economy to produce at potential output.

Blank 1: inflation

During the COVID pandemic, fiscal stimulus money received by consumers, coupled with problems in the supply chain, caused aggregate demand to exceed aggregate supply—a situation that resulted in a jump in the U.S. ___ rate.

Blank 1: inflation

The members of the FOMC assess whether the current Federal funds rate remains appropriate for achieving low ___ and full ___.

Blank 1: inflation Blank 2: employment

Changes in the interest rate mainly affect the ___ component of total spending, and also affect spending on durable consumer goods that are purchased on credit.

Blank 1: investment

The impact of changing interest rates on ___ spending is great because of the large cost and long-term nature of capital purchases.

Blank 1: investment

A ___ interest rate environment will encourage investment, raise aggregate demand and unleash demand-pull inflation.

Blank 1: low or lower

Speed, flexibility, and isolation from political pressure are main advantages of policy.

Blank 1: monetary

This figure represents the market for ___ , in which the demand curve and the supply curve are brought together.

Blank 1: money

The real, not the ___ rate of interest is critical for investment decisions.

Blank 1: nominal

The buying and selling of securities in the ___ ___ has the advantage of flexibility and the impact on bank reserves is prompt.

Blank 1: open Blank 2: market

The time it takes for the Fed to realize that a fluctuation in economic activity is heading toward a genuine recession is called the ___ gap.

Blank 1: recognition

With ___ monetary policy, the Fed will announce a higher federal funds target range, raise the IORB and ON RRP rates, or sell longer-term government securities.

Blank 1: restrictive, contractionary, or tight

When the Fed buys ___ from the public, people may choose to pay off existing loans with the money received, rather than increasing their spending on goods and services.

Blank 1: securities, bonds, or debt

How has the Fed maintained high reserve balances in the banking systems since the start of the COVID-19 pandemic?

By purchasing large amounts of bonds

Why do changing interest rates have a large influence on investment spending?

Capital purchases have a large-cost. Capital purchases have a long-term nature.

Which tool of monetary policy did the Fed use during the financial crisis to help banks meet the reserve ratio?

Discount rate

Under which conditions should the Fed follow an expansionary monetary policy?

During a recession When the GDP gap is negative

What was the goal of quantitative easing after 2008?

Encourage the banks to lend more

The rate at which the amount of money demanded and the amount supplied are equal is called what?

Equilibrium interest rate

By lowering interest rates to bolster borrowing and spending to increase aggregate demand, the Fed is instituting which type of monetary policy?

Expansionary

During a recession, with a negative GDP gap and substantial unemployment, the Fed should institute what type of monetary policy?

Expansionary

True or false: Expansionary monetary policy will increase interest rates to bolster borrowing and spending, which will increase aggregate demand and expand real output.

False

Which of the following are advantages of the buying and selling of securities in the open market?

Flexibility. Prompt impact on bank reserves.

The members of the FOMC evaluate whether the current Federal funds rate is proper for achieving which of the following?

Full employment Low inflation

Which of the following are functions of restrictive monetary policy?

Increase interest rates Curtail the expansion of aggregate demand

An increase in the money supply will do which of the following?

Increase investment Increase aggregate demand

Which actions can the Fed plan in order to engage in restrictive monetary policy?

Increase the IORB and ON RRP rates Sell longer-term bonds as part of quantitative tightening

Which of the following are results of restrictive monetary policy?

Interest rates rise. Money supply falls.

Which interest rate is the most critical for investment decisions?

Real

A high interest rate environment will have which of the following effects?

Restraining demand-pull inflation Discourage investment. Lowering aggregate demand

During times of rising inflation the Fed will undertake which of the following monetary policies?

Restrictive

When aggregate demand is excessive relative to the economy's full-employment level of real output, the Fed will institute what type of monetary policy?

Restrictive

Which of the following are actions that the Fed may take to decrease the money supply?

Sell government bonds as part of QT Raise the effective federal funds rate

Which of the following are advantages of monetary policy over fiscal policy?

Speed Isolation from political pressure Flexibility

What effect did the actions of the Fed have on the COVID-19 recession?

They shortened it.

Why did the Fed implement a zero interest rate policy (ZIRP) in 2008?

To stimulate the economy To keep interest rates near zero

Which measures were taken by the Fed to prevent a damaging economic crisis in the wake of the COVID-19 lockdown?

Using forward guidance to reassure the public Employing adminstrative rates to lower interest rates Making massive purchases of long-term bonds

What led the Fed to implement quantitative easing?

Zero lower bound problem

The levels of output, employment, income, and prices all result from the interaction of Blank______.

aggregate supply and aggregate demand

In 2007 a major wave of on home mortgages threatened the health of any financial institution that had invested in home mortgages.

defaults

Buying bonds, lowering the reserve ratio, lowering the discount rate, or increasing reserve auctions involve what type of monetary policy?

expansionary

The Federal Reserve's holdings Blank______ during the COVID-19 recession.

increased from $4.1 trillion to $7.1 trillion

Aggregate demand includes which of the following?

investment spending (I) Government spending (G) Net exports (X-M) Consumption spending (C)

The efforts of the Fed when it increases reserves will be pointless if commercial banks seek liquidity and are unwilling to Blank______.

lend

If pursued vigorously, a restrictive monetary policy could deplete commercial banking reserves to the point where banks would be forced to reduce the volume of Blank______. Multiple choice question.

lending

Because it works more subtly, what policy is more desirable?

monetary

The policy that is highly effective in slowing expansions and controlling inflation but less reliable in pushing the economy from a severe recession is called Blank______ policy,

monetary

Which of the following describe monetary policy as compared to fiscal policy?

more politically neutral subtler

What threatened the U.S. economy in 2007?

mortgage defaults

The Federal Reserve's actions during March and April 2020 were Blank______ the quantitative easing that it engaged in from 2011-2014.

of the same magnitude as

John Taylor's rule of thumb builds on the belief that in order to help the economy to produce at potential output, central banks are willing to tolerate Blank______.

positive rates of inflation.

During times of rising inflation the Fed will undertake ___ monetary policy or "tight money policy."

restrictive

In the figure, if aggregate Blank______ declines, the economy's equilibrium will move leftward along the dashed horizontal line.

supply demand

During the financial crisis and severe recession, the Fed was credited with Blank______.

taking innovative actions

What is cyclical asymmetry?

the idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession

In the figure, the demand curve for money and the supply curve of money are brought together, representing Blank______.

the market for money

There is an ___ relationship between the interest rate and the amount of investment spending.

Blank 1: inverse, indirect, or negative

Arrange the events that are caused by a restrictive monetary policy in the order they occur, with the first event at the top.

Interest rates will rise. investment spending will drop. aggregate demand will fall. inflation will decline.

What is the nature of the relationship between the interest rate and the amount of investment spending?

Inverse

Which portion of total spending is influenced the most by interest rate changes?

Investment expenditure

How does higher investment spending influence the aggregate demand curve?

It moves it to the right.

What was one of the primary reasons fiscal policy was used during the financial crisis and severe recession?

Liquidity trap

Which of the following are actions that the Fed may take to increase the money supply?

Lower the IORB and ON RRP rates Lower the effective federal funds rate

Which of the following actions did the Fed take in response to the mortgage debt crisis?

Lowered the discount rate Lowered the Federal funds rate

What has become the dominant component of U.S. national stabilization policy?

Monetary policy

True or false: Economists say that monetary policy may suffer from cyclical asymmetry.

True

Which of the following monetary policies addresses the problem of inflation?

restrictive

Which of the following were causes of increased inflation during the second year of the COVID-19 pandemic?

Fiscal stimulus checks sent to individuals by the government Disruptions in the supply chain

Which of the following lags does monetary policy face?

Operational Recognition

The interaction of aggregate supply and aggregate demand result in the levels of which of the following?

Output Income Employment

In the figure, if aggregate demand decreases from AD2, what is represented by the movement along the dashed horizontal line?

The change in the economy's equilibrium