Econ 202 Exam 3 Curott

What is a possible reason for the Fed's inability to prevent a recession?

Much of the information about the economy is unknown when the Fed is making policy.

A nominal GDP rule says _____ should always grow at a constant rate.

Mv

If the economy is hit by a negative real shock that reduces real GDP growth below its long-run potential rate, which of the following is the appropriate monetary policy to move real GDP growth back to the long-run rate without raising inflation?

No monetary policy can achieve this goal.

If the Fed wants to raise real GDP growth by raising money supply growth, which of the following conditions will make monetary policy more effective in raising real GDP growth?

Prices continue to remain very sticky.

If a teleportation device were invented, which of the following would happen?

Purchasing power parity would hold more closely.

_____ refers to the Federal Reserve's purchase of longer-term government bonds or other securities.

Quantitative easing

What can happen when a government continues to use expansionary fiscal policy even as government debt becomes a problem?

Real growth can continue to fall.

A negative real shock causes the economy's:

SRAS and LRAS curves to shift inward.

Which of the following is a U.S. current account transaction?

Selling a computer chip to a resident in Europe.

If the Fed buys bonds in the open market, which of the following will likely NOT happen?

Short-term interest rates increase.

If the Fed overreacts to a negative spending shock by increasing money growth too much:

both real GDP growth and inflation will increase more than the Fed prefers.

President Obama's fiscal policy response to the 2008 recession involved changes in:

both taxation and government spending.

In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of:

both the real shock and the increase in money growth.

An increase in money growth will cause the inflation rate to increase in:

both the short run and the long run.

Open market operations occur when the Fed:

buys and sells government bonds.

How did the Fed encourage business confidence after the September 11 terrorist attacks?

by lending billions to banks

Foreign portfolio investment is included in the _____ account.

capital

The trade deficit and the _____ surplus essentially balance out and offset each other.

capital

A trade deficit is balanced by a:

capital account surplus.

A country is running a _____ when the inflow of foreign capital is greater than the outflow of domestic capital to other nations.

capital surplus

A situation where foreign capital inflow exceeds domestic capital outflow to other nations is called a(n):

capital surplus.

When the inflow of foreign capital is greater than the outflow of domestic capital to other nations, a country runs a:

capital surplus.

Expansionary fiscal policy can reduce real growth if the increase in government spending:

causes a large enough decrease in private spending.

The capital account measures:

changes in foreign ownership of domestic assets.

Which of these is a form of fiscal policy?

changes in government spending, tax rebates, and tax rate cuts

M1 is equal to currency plus:

checkable deposits.

The Federal Reserve:

conducts monetary policy.

When fiscal policy is funded through taxes, government spending primarily crowds out:

consumer spending.

Government spending is a more effective policy tool when:

consumers are pessimistic and not spending.

The largest spending component of GDP is:

consumption.

The Federal Reserve reduced the Federal Funds rate during the recession of 2000-2001. Directly following the recession the Federal Funds rate:

continued to decrease, but remained positive.

(Table: Four Countries) Refer to the table. Which of these countries has a trade deficit?

country C

If a central bank wishes to reduce inflation, it should announce its intentions and follow through with them, thereby using _____ monetary policy.

credible

Which poses a limit to fiscal policy?

crowding out, the size of government expenditures, and legislative lags

When an increase in government spending leads to a decrease in private spending it is called:

crowding out.

Which is the MOST liquid asset?

currency

M1 refers to:

currency plus checkable deposits.

The monetary base (MB) refers to:

currency plus total reserves held at the Fed.

M2 refers to:

currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits.

The _____ is the sum of the balance of trade, net income on capital held abroad, and net transfer payments.

current account

If the public's demand for holding cash increases, the growth rate of money velocity will:

decrease

If the Fed sells $200 million in government bonds, the total money supply will:

decrease by more than $200 million.

If the current account deficit indicates a problem with savings, a good way to deal with it is to:

decrease the government's budget deficit.

In the short run, a decrease in consumption growth will cause the inflation rate to:

decrease.

In the short run, a negative AD shock will cause the inflation rate to:

decrease.

Crowding out is the _____ in private spending that occurs when government _____ spending.

decrease; increases

Which of the following is NOT a way that a country can finance a trade deficit?

decreased exports

An increase in government spending can reduce real GDP growth if:

decreases in private spending more than offset the increase in government spending.

A decrease in the price level is called:

deflation

Which asset would you classify as being most liquid?

demand deposits

Required reserves are the percent of:

deposits banks are required to hold as reserves.

Suppose an increase in the demand for dollars has caused an appreciation of the dollar. According to the purchasing power parity theorem, the value of the dollar in the future will:

depreciate

With a floating exchange rate, when the Federal Reserve increases the U.S. money supply, the U.S. dollar will:

depreciate

A relatively loose commitment to a floating exchange rate produces a:

dirty float.

When banks borrow directly from the Fed, the interest rate on those loans is the:

discount rate.

A reduction in the rate of inflation is called:

disinflation

The money multiplier equals one:

divided by the reserve ratio.

When c arrow falls, the LRAS curve:

does not move.

When the Federal Reserve buys bonds, the supply curve for bonds:

does not shift.

The economy's AD curve is:

downward sloping.

Low interest rates are in essence a signal to market participants that credit is:

easy and it is good idea to borrow money.

Reserves held at the Fed are:

electronic claims that can be converted into currency if the bank wishes.

If the Fed wants short-term interest rates to rise, it could:

engage in a monetary contraction.

Debt can be such a problem that:

expansionary fiscal policy can reduce real growth.

In 2006, house prices started to _____, making homeowners feel _____.

fall; poorer

The twin deficits refers to the case when a:

federal government budget deficit leads to a trade deficit.

The Federal Reserve is the:

federal government's bank, central bank, and banker's bank in the United States.

Moral hazard occurs when:

financial institutions take on too much risk because they are insured.

An exchange rate system in which the government or central bank has agreed to convert its currency into another at a fixed rate is called a:

fixed exchange rate.

In which currency system is the exchange rate determined only by supply and demand in the currency market?

floating exchange rate

Economists who think that the Fed is likely to make a lot of mistakes believe that the Fed is best advised to:

follow a consistent policy.

Which of the following includes the activity of a foreign firm constructing a new manufacturing plant in the United States?

foreign direct investment

An insolvent bank is one that:

has more liabilities than assets.

U.S. capital account surpluses are NOT related to:

high money supply growth.

The disinflation experiment reduced inflation in the United States, but at the cost of:

high unemployment.

The disinflation of the 1980s led to:

high unemployment.

A problem that makes fiscal policy less effective is that:

higher taxes or increased borrowing to fund government spending can reduce aggregate demand.

The money multiplier is greater than one because banks:

hold only a fraction of deposits as reserves.

Under fractional reserve banking, banks:

hold only a fraction of deposits in reserve, lending the rest.

Transactions in the current account include:

imports

In the short run, an increase in government spending growth will cause the real GDP growth to:

increase

When the Federal Reserve makes an open market purchase, the reserves of the banking system will:

increase

(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. In the best case scenario, effective fiscal policy would take which action to correct an economy in recession at point Z?

increase aggregate demand to move the economy to point X

If the Federal Reserve responds to a negative real shock with a decrease in money growth, the Federal Reserve's response will cause inflation to:

increase by less than it otherwise would have.

In order for fiscal policy to effectively offset a $1 million decrease in consumer spending, the government would MOST likely have to:

increase spending by less than $1 million.

To reduce the money supply in the economy, the Fed would:

increase the discount rate.

To offset the effect of negative growth in money velocity (v arrow), the central bank should:

increase the growth rate of the money supply.

In the short run, an increase in government spending growth will cause the inflation rate to:

increase.

In the short run, an increase in government spending growth will cause the real GDP growth to:

increase.

When the Federal Reserve makes an open market purchase, the reserves of the banking system will:

increase.

With a floating exchange rate, an increase in the U.S. demand for Japanese exports will cause the supply of yen to:

increase.

Low interest rates in 2003-2004:

increased demand for homes.

Shortly after September 11, 2011, the Federal Reserve:

increased its lending to banks.

As the savings rate in the private sector rises:

increases in government spending become a more effective means of stimulating aggregate demand.

An increase in Americans' demand for vehicles made in Europe:

increases the demand for euros, and so the euro appreciates.

Refer to the figure. Suppose the economy is initially at point A in the diagram. If a decrease in investment spending causes a shift of the AD curve from AD1 to AD2, then the government can avoid a short-run recession by:

increasing government spending so that the AD curve shifts back to AD1.

If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by:

increasing money supply growth, lowering real interest rates, and encouraging borrowing.

An economy in which the central bank overstimulates aggregate demand will suffer from:

inflation

When the Fed supplies "too much" monetary stimulus in the face of a negative aggregate demand shock:

inflation, real growth, and nominal wage growth all increase.

An economy in which the central bank overstimulates aggregate demand will suffer from:

inflation.

The Federal Reserve provided a loan to finance J. P. Morgan's purchase of Bear Stearns because Bear Stearns was too:

interconnected with other banks to let fail.

When fiscal policy is funded by issuing bonds, government spending primarily crowds out:

investment

Ricardian equivalence:

is less significant when consumers deem tax cuts or rebates as permanent.

If households use tax rebate checks to pay off their existing debt (such as credit cards and mortgages), this type of fiscal stimulus:

is likely to have a negligible impact on aggregate demand.

Crowding out:

is the decrease in private spending that occurs when government spending increases.

The Federal Reserve acquires its exclusive powers through its ability to:

issue money.

Holding reserves is costly for banks because:

it leads to fewer profits.

As a result of the multiplier effect, a tax cut causes a:

larger shift of the aggregate demand curve to the right.

Increases in government spending financed through additional borrowing will typically:

lead to higher interest rates.

The time it takes Congress to propose and pass a plan for fiscal policy is called the:

legislative lag.

Discount rate lending occurs when the Federal Reserve:

lends reserves directly to banks.

Monetary policy is:

less effective in dealing with real shocks than with aggregate demand shocks.

Crowding out:

limits the increase in aggregate demand due to fiscal policy.

Which concept describes the ease with which an asset can be quickly converted into money without losing its value?

liquidity

The discount rate is the interest rate charged on a(n):

loan from the Federal Reserve to a bank.

Which is a reasonable cause for the formation of the housing bubble in the 2000s?

low Federal Funds rate

If the Fed reduces (m arrow) to fight inflation after a negative real shock, which of the following should occur?

lower real growth

A temporary investment tax credit tends to:

make investments that would have happened anyway happen earlier.

Which is NOT a duty performed by the Federal Reserve System?

manage the federal budget deficit

An exchange rate system in which the exchange rate is allowed to float unless the exchange rate reaches certain bounds is called a:

managed float.

Fiscal policy is more effective in affecting economic activity if:

many resources are unemployed.

The capital account:

measures changes in foreign ownership of domestic assets, including financial assets like stocks and bonds, as well as physical assets.

The recession that began in 2001 was:

mild and didn't last long, but employment never recovered.

Which is NOT a lag associated with the implementation of fiscal policy?

monetary lag

Disinflation in the 1980s would have been shorter if:

monetary policy had been more credible.

(1 / reserve ratio) is the:

money multiplier.

If the United States imports $100 billion worth of goods and services from Mexico and exports $75 billion worth of goods and services to Mexico, then:

the United States has a $25 billion trade deficit with Mexico.

"Other investment" takes place in the United States when foreigners:

shift bank deposits into the United States from other countries.

A negative real shock causes the LRAS curve to:

shift inward.

When the Federal Reserve buys bonds, the demand curve for bonds:

shifts outward.

Fiscal policy is MOST effective in offsetting the effects of:

shocks to aggregate demand.

The Fed has the greatest influence over _____ interest rates. Investment spending depends on _____ interest rates.

short-term; long-term

Which is the LEAST liquid means of payment?

small-time deposits

If the value of a bank's liabilities is greater than its assets, there is a:

solvency crisis.

Which is NOT a means of payment in the United States?

stock options

The Fed loaned money to J. P. Morgan and AIG because it was concerned about:

systemic risk, should these banks fail.

Fiscal policy involving _____ is designed to influence business cycle fluctuations.

taxation, government spending, and borrowing

Ricardian equivalence refers to the case where lower taxes today lead to higher:

taxes in the future.

If Ricardian equivalence holds:

taxpayers respond to lower tax rates today with increased savings today.

The capital account of the United States increases when:

the Chinese government buys American government bonds.

The Fed's job in manipulating monetary policy is made harder by the fact that:

the Fed operates in real time and information on recessions becomes available with a lag.

Which institution usually has the most influence over aggregate demand in the United States?

the Federal Reserve

When Koreans buy stock on the NYSE:

the U.S. capital account increases.

When a German automaker opens a new plant in Alabama:

the U.S. capital account surplus increases and the U.S. current account surplus decreases.

Consider the exchange market for the U.S. dollar versus the Japanese yen. The demand for yen comes from:

the United States only.

Purchasing power parity is limited by:

the costs of trading, transacting, and shuffling resources.

The crowding out effect of fiscal policy refers to:

the decrease in private spending as a result of higher government spending.

Which of the following prevents the purchasing power parity theorem from holding perfectly?

transportation costs, goods that cannot be shipped, and tariffs and quotas

The Fed's power to influence aggregate demand is constrained by:

uncertainty and an inability for everyone to fully understand the complexity of the economy.

What explains why Argentina had a greater than 100% crowding out during the 1999 to 2002 period?

uncertainty and pessimism

Fiscal policy is a good option to stimulate an economy when:

unemployment is very high.

The bandwagon effect causes investment to be:

unevenly distributed over time.

The primary concern of economists worried about the crowding out effect is the:

upward pressure that increased borrowing places on interest rates.

In the face of a negative shock to consumer confidence, politicians are on the fence about whether to implement policies based on the advice of economists or to make decisions on the basis of Tarot card readings. What would happen during the period in which they are making up their minds about which strategy to pursue?

v arrow would fall

Which does NOT explain when fiscal policy is most likely to matter?

when the monetary policy lags behind fiscal policy

Suppose the government subsidizes the price of bananas, making it so low that you buy an enormous number of bananas and store them on your roof. If your roof caves in, it's

your fault.

If the exchange rate between the U.S. dollar and the euro is $1 for €0.75, then the price of €1 is:

$1.33.

If $500,000 in new taxes is raised and spent on building a new school and $300,000 in private spending would have been spent anyway, how much is added to short-run aggregate demand?

$200,000

Which is NOT included in the U.S. money supplies M1 and M2?

bond mutual funds

One of the Fed's greatest powers is its ability to:

boost market confidence.

When consumers cut back on spending _____fall(s).

the velocity of money

Fiscal policy is MOST effective when:

there are many unemployed resources.

What is the purpose of the Fed's structure?

to keep the power of the Fed dispersed

The United States currently has a net _____ with the rest of the world.

trade deficit

When you shop at Old Navy, you run a private _____ with Old Navy.

trade deficit

Adding up the _____ and the _____ will net out the balance of payments to zero.

trade deficit; capital surplus

Which of the following would increase the demand for U.S. dollars?

Japan increases its purchases of U.S. corn.

Consider the exchange market for the U.S. dollar versus the Japanese yen. The supply of yen comes from:

Japan only.

currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits.

M2

Which statement is correct?

M2 is always larger than M1.

Which statement is TRUE regarding the effects of monetary policy when a real shock occurs?

Monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate.

When an economy is adjusting to a recent reduction in the money supply, what is a likely consequence?

Unemployment is high.

(Figure: A Real Shock) Refer to the figure. After a real shock, the economy is operating at point Y in the figure. Assuming there is no crowding out, fiscal policy that shifts aggregate demand from AD0 to AD2 will move the economy to point:

V.

What happens to GDP if the Fed is too responsive to changes in aggregate demand?

Volatility increases.

(Figure: A Real Shock) Refer to the figure. After a real shock, the economy is operating at point Y in the figure. In the presence of crowding out, fiscal policy that would have shifted aggregate demand from AD0 to AD2 will only move the economy to point:

X.

The paper currency circulated in the United States is called:

a Federal Reserve note.

Which is NOT a means of payment?

a credit card account limit

Other things equal, will an individual tax rebate or a cut in tax rates provide the largest stimulus?

a cut in tax rates

When consumers reduce spending, the reduction in the velocity of money is split between:

a decrease in growth and a decrease in inflation.

A decrease in the value of the domestic currency in terms of other currencies is called _____ of the domestic currency.

a depreciation

When the Fed responds to a negative spending shock by increasing the money supply, it is using:

a discretionary policy.

The case when an increase in government spending isn't large enough to significantly increase aggregate demand is called:

a drop in the bucket.

A system in which the exchange rate is determined primarily by market forces is called:

a floating exchange rate.

Banks retain only a small portion of their deposits as reserves in:

a fractional reserve banking system.

The problem with fiscal policy that is created because of the recognition, legislative, implementation, effectiveness, and the evaluation and adjustment lags is called:

a matter of timing.

Fiscal policy under the 2009 American Recovery and Reinvestment Act took the form of:

a mix of government spending and tax cuts.

Which is the MOST effective fiscal policy for influencing the economy?

a permanent tax cut

When a central bank reacts the same way to a shock every time, it is likely using:

a policy rule.

A country with a negative current account (trade deficit) has:

a positive capital account.

Which shock can the Fed deal with most effectively?

a shock to AD

A country's balance of payments is:

a summary of all of the economic transactions between residents of one country and residents of the rest of the world.

The balance of payments is:

a summary record of a country's economic transactions with the rest of the world.

The balance of payments is:

a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world.

Automatic stabilizers are changes in fiscal policy that affect _____ without the need for explicit action by policymakers.

aggregate demand

The BEST type of negative shock for fiscal policy to respond to is a negative shock to:

aggregate demand.

Suppose the Fed reacts to an economic shock and quickly restores the economy to its long-run potential growth rate. It is most likely that this shock was:

an aggregate demand shock.

The multiplier effect from an increase in government spending causes additional increases in aggregate demand through:

an increase in consumer spending.

Which of the following results in an appreciation of the U.S. dollar?

an increase in foreign investment in the United States

If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be:

an increase in money supply growth.

An exchange rate appreciation is:

an increase in the price of one currency in terms of another currency.

An appreciation of the Mexican peso would most likely be a result of:

an increase of foreign investment in Mexico.

(Figure: Negative Supply Shock) Refer to the figure. This economy initially begins at point A and a negative supply shock takes it to point Y. Taking the economy back to the LRAS curve would require:

an inflation rate much greater than 16%.

When the Fed buys U.S. government bonds to affect the money supply, it is conducting:

an open market purchase.

When a country becomes more attractive for foreign investment, we would expect a(n):

appreciation of the country's exchange rate.

Fiscal policy lags:

are generally longer than monetary policy lags.

Fiscal policies that help an economy in a recession without deliberate actions by policymakers are called:

automatic stabilizers.

The lags associated with monetary policy make its implementation more difficult during:

both expansions and recessions.

Which items are usually cheaper in poorer countries?

services

A country can adopt a fixed exchange rate system through:

setting up a currency union.

The BEST type of negative shock for the Federal Reserve to respond to is a negative shock to:

AD

A decrease in money supply growth will cause the:

AD curve to shift to the left.

In the AD-AS diagram, a "tight" monetary policy shifts the:

AD curve to the left.

(Table: Multiple Deposit Expansion) Refer to the table. For the multiple deposit expansion process described in this table, what is the maximum amount of loans that the Third National Bank can make if it decides to hold 1% of deposits as excess reserves?

$308,089.60

(Table: Statistics for a Small Economy) Refer to the table. The table shows some statistics for a small economy. Using only the information provided, M1 in this country amounts to:

$57 million.

If banks keep one-eighth of their deposits in the form of reserves, and the Fed credits Alex's bank account with $8,000, how much does the money supply increase?

$64,000

If the Fed credits Alex's checking account with $8,000 and Alex's bank decides to keep the entire $8,000 in the form of reserves instead of lending it out, how much does the money supply increase?

$8,000

(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. In the best case scenario, an economy in a recession at point Y would use fiscal policy to increase spending growth to:

10%.

(Table: Annual Inflation) Refer to the figure. This table shows inflation data for an economy. During what period did this economy experience disinflation?

2001 to 2002

If purchasing power parity holds and the nominal exchange rate is 1.5 U.S. dollars for one Canadian dollar, then a Big Mac that costs two Canadian dollars in Canada will cost _____ U.S. dollar(s) in the United States.

3

Monetary policy by the Fed is estimated to take _____ to have an impact on the economy.

6 to 18 months

Which statement is NOT a major limit to the effectiveness of fiscal policy?

A multiplier effect is associated with changes in spending and taxation.

Which statement is TRUE of the difference between a tax cut and a tax rebate?

A tax cut increases the incentive to work and the incentive to spend, while a tax rebate only increases the incentive to spend.

Refer to the figure. Suppose a given economy starts at point A in the figure. If the Fed engages in an expansionary monetary policy, what would you expect to happen in the short run?

Aggregate demand will increase because of lower interest rates.

Ben Bernanke was _____ during the financial crisis of 2008.

Chairman of the Federal Reserve

What country is the World Bank's largest borrower?

China

Which statement is TRUE about the difference between monetary and fiscal policy?

Monetary policy is subject to long lags.

Which is a limitation of monetary policy in stabilizing the economy?

Monetary policy is subject to uncertain lags.

China is the world's leading producer of rare earth metals. What will happen to the value of the yuan if demand for rare earth metals increases and the government does not intervene?

It will appreciate.

An increase in the demand for a country's exports will have what effect on its currency?

Its value will increase.

(Table: Exchange Rates) Using the hypothetical exchange rate information in the table, which of the following statements is correct?

In 2004, the price of one Japanese yen had not changed relative to European euros.

How can the Fed offset a positive shock to aggregate demand?

Decrease the growth rate of the money supply.

Which does NOT explain why the 1997-2006 housing boom increased aggregate demand?

During the boom, some builders were working 60 or 80 hours a week instead of 40.

The government's bank and the bankers' bank in the United States are called the:

Federal Reserve System.

Which statement pertains to the condition of crowding out?

Government raises taxes by $300 million to finance new spending on highway construction, resulting in a decrease in investment spending by $270 million.

What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?

The Fed must operate in real time, when a lot of the data about the state of the economy are unknown.

What do many economists think contributed to the greater than 13% inflation rates experienced by the United States in the 1980s?

The Fed overstimulated the economy with too much money in the 1970s.

(Figure: Monetary Policy and Demand Shocks) Refer to the figure. In the figure, assume the initial real growth rate of the economy is 3% when a positive aggregate demand shock shifts the AD curve from AD1 to AD4. As a result of the Fed's policy response, the AD curve shifts to AD3 in the short run. Which of the following is TRUE about the Fed's policy response?

The Fed responded too much to the shock.

Which is the MOST credible monetary policy action?

The central bank announces its policy in public and sticks with the policy over time.

Under which circumstance should an economic advisor for a small economy recommend a large increase in government spending?

The country is in a recession that seems to be turning into a depression.

Use the figure to answer the following question: If the British become wealthier and begin importing more goods from the European Union, which shift would occur in the foreign exchange market for euros?

The demand for euros would shift to the right.

What reason do many people think explains why the Fed overstimulated the money supply in the 1970s?

because of the high unemployment associated with the oil crises

Refer to the figure. Assume the government of an economy in recession at point Y in the diagram is aware of the expenditure multiplier when it formulates policy decisions. If it chooses to increase government spending growth by 4percentage points, it should expect the economy to:

move at least to point X.

When a foreign business buys stock in a U.S. company, the U.S. capital account will:

move in a positive direction.

As the government builds new schools, the construction workers and material vendors employed on the project spend more in the community where they live. What is the economic term for this effect?

multiplier

The collapse of a financial bubble in 2008 is best regarded as a:

negative shock to aggregate demand.

In the long run, with a floating exchange rate, changes in _____ will have an impact on the real exchange rate.

neither the U.S. money supply nor the foreign country's money supply

In the long run, an increase in the growth rate of the money supply causes _____ in the real exchange rate and _____ in the real GDP growth rate.

no change; no change

A rule that has been suggested to compensate for unexpected changes in velocity is a(n):

nominal GDP rule.

Tight monetary policy results in a long period of disinflation and high unemployment if:

nominal wages are sticky.

Imagine an economy in a recession resulting from a decrease in consumer spending. In the best case scenario, increased government spending to fight the recession would:

not need to be as large as the initial fall in consumer spending.

The most appropriate monetary policy response to an asset price bubble for a central bank is to:

not react to asset price bubbles because monetary policy can only affect aggregate demand, not demand in a specific market.

Ricardian equivalence:

occurs when people see that lower taxes today means higher taxes in the future, so instead of spending their tax cut they save it to pay future taxes.

The money multiplier equals:

one divided by the reserve ratio.

Purchasing power parity is an application of the law of:

one price.

The Fed recapitalizes banks:

only in dire emergencies to avoid insolvency.

The Federal Funds rate is the:

overnight lending rate on loans from one major bank to another.

The Federal Funds rate is the interest rate charged on a(n):

overnight loan from one bank to another.

The discount rate is the interest rate that banks:

pay when borrowing directly from the Fed.

If the government gave a tax rebate to the people, but aggregate demand remained unchanged, the MOST likely reason is that:

people saved all the additional money from the rebate in order to pay for future tax increases.

(Figure: Negative Supply Shock) Refer to the figure. This economy initially begins at point A and a negative supply shock takes it to point Y. If the Fed reacts by increasing money growth by 3%, this would take the economy to:

point X.

Because the Fed can easily provide too much or too little response to economic shocks, many economists advocate:

policy rules.

When Koreans buy stock on the NYSE:

portfolio investment in the United States increases.

What was Milton Friedman's reasoning behind the 3% growth rule for money supply?

price stability

The Term Auction Facility involves the Federal Reserve:

providing reserves to banks through an auction.

Suppose the economy is growing faster than its long-run potential growth rate. To bring the real growth rate back to the long-run potential rate, the Fed should:

raise the discount rate.

The reserve ratio (RR) is the:

ratio of reserves to deposits.

As a result of an increase in the growth rate of the money supply:

real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run.

Expansionary monetary policy lowers the:

real exchange rate in the short run, but not in the long run.

The time necessary to determine that an economic problem exists is called the:

recognition lag.

(Figure: Monetary Policy and Demand Shocks) Refer to the figure. In the figure, assume the initial real growth rate of the economy is 3% when a negative aggregate demand shock shifts the AD curve from AD1 to AD2. The correct monetary policy response is to:

reduce money supply growth, so that the AD curve remains at AD2.

(Figure: Monetary Policy and Demand Shocks) Refer to the figure. In the figure, assume the initial real growth rate of the economy is 3% when a positive aggregate demand shock shifts the AD curve from AD1 to AD4. The correct monetary policy response is to:

reduce money supply growth, so that the AD curve shifts back to AD1.

The bursting of the bubble in the housing market caused homeowners to:

reduce spending.

The tax rebate of 2008 had a relatively small impact because taxpayers primarily used the rebate to:

reduce their debts.

The Federal Reserve:

regulates the banking system.

Suppose the federal government gives taxpayers a tax rebate financed by borrowing. If taxpayers use the tax rebate to pay off their debts, total spending will:

remain unchanged.

Fiscal policy is well-suited to counteract a recession or depression when:

resources are underused.

Rank the major means of payment from the largest to the smallest amount of dollars.

savings deposits, money market mutual funds, small-time deposits

A government can finance its spending by:

selling bonds.

(Figure: Rupee Foreign Exchange Market for U.S. Dollars) Based on the figure, what will a rise in real interest rates in the United States cause?

the demand for dollars to shift to the right

Which rate does the Fed actually set?

the discount rate

Consider the exchange rate between the U.S. dollar and the Japanese yen. If the yen appreciates, then:

the dollar must depreciate.

What does knowing that $1.25 buys one euro tell you?

the exchange rate

The macroeconomic case for government spending is strongest when:

the government faces some immediate emergency.

When a recession is caused by a real shock, an expansionary fiscal policy will result in an increase in:

the inflation rate which is higher than the increase in the growth rate.

When the Fed sells government bonds in the open market:

the monetary base decreases and interest rates increase.

The Fed has the most control over:

the monetary base.

The Federal Reserve controls the Federal Funds rate through its control of:

the monetary base.

As the reserve ratio rises:

the money multiplier will decrease.

If combine harvesters are cheaper in the United States than they are in Canada, the law of one price predicts that once exchange rates are taken into account:

the prices of combine harvesters in the two countries will equalize in the long run if transportation costs and tariffs are not a barrier.

Bond-financed increases in government spending are MOST likely to be effective when:

the private sector is reluctant to spend.

The nominal exchange rate is:

the rate at which you can exchange one currency for another.

The real exchange rate is:

the rate at which you can exchange the goods and services of one country for the goods and services of another.

Systemic risk is:

the risk of contagion that occurs when a failing financial institution owes significant sums of money to other financial institutions.

An increase in money growth will cause output growth to increase in:

the short run only.

The current account is:

the sum of the balance of trade, net income on capital held abroad, and net transfer payments.

(Figure: Rupee Foreign Exchange Market for U.S. Dollars) Based on the figure, what will a decrease in the money supply by the Federal Reserve cause?

the supply of dollars to shift to the left