Econ 321 final exam

quiz 20 Over the two-year period during which the financial crisis occurred, the amount of assets in the Federal Reserve balance sheet increased by:

2.5 times.

Which of the following would not shift the aggregate expenditures curve?

A change in the real interest rate

Given a central bank's monetary policy reaction curve, if inflation increases by 1% why would policymakers likely have to increase the nominal interest rate by more than the increase in the expected rate of inflation?

A write in question The higher rate of inflation will have the policymakers wanting to raise the real interest rate. Since the real interest rate is the nominal interest rate less the rate of inflation, raising the nominal interest rate by the same amount that the rate of inflation has increased may not raise the expected real interest rate.

Which of the following statements is incorrect?

Any point on the short-run aggregate supply curve reflects current inflation equals target inflation.

Given the following formula for the Taylor rule: Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) If output in the economy were to fall by an additional one percent below potential, the target federal funds rate would:

Decrease by 0.5%.

Given the following formula for the Taylor rule: Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) If the inflation rate in the economy were to fall by 2% below the target inflation rate, the target federal funds rate would:

Decrease by 3.0%.

Which of the following statements is most correct?

Discount loans are made when banks need relatively small amounts of cash for the short term.

Of the following, which would not be considered an unconventional monetary policy approach?

Discount rate

quiz 22 Which of the following statements is most correct if the Fed sees no need to engage in expansionary monetary policy?

Eventually, the Fed will shrink its balance sheet by letting securities it holds expire.

Harry gets $1,000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. Considering Harry's personal balance sheet, his assets:

Increased when he received the $1,000 in currency from his grandfather.

Which of the following statements is most correct?

It is impossible to have high, sustained inflation without monetary accommodation.

If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = excess reserves, then m would equal:

M /MB.

Which of the following would be categorized as an unconventional monetary policy tool?

Targeted asset purchases

quiz 22 Which of the following statements is true?

The ECB's marginal lending facility was the model for the Fed's redesign of its procedures for lending to banks.

What are the determinants of the potential output for an economy?

The key determinants are the levels and quality of economic inputs, these include the size and quality of the labor force (human capital), the size and quality of the capital stock, the amount and quality of natural resources. In addition, the level of technology that exists can contribute to how well these inputs are used to produce output. This is the basic production function that is the foundation of any study of the relationship between output and inputs.

Harry gets $1,000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact on the monetary base of Harry's deposit?

The monetary base did not change

What would be the impact on the monetary policy reaction curve if the Fed were to raise the target inflation rate?

The monetary policy reaction curve shifts to the right

Rank the components of aggregate demand by their sensitivity to changes in the real interest rate. Start with the most sensitive to the least sensitive.

The most sensitive is investment demand, followed by consumption and net exports. Consumption is affected because higher interest rates mean higher inflation-adjusted payments for goods such as cars, making them cost more. In addition, higher interest rates increase the return to saving and more saving means less consumption. Net exports are affected since the value of the dollar on foreign exchange markets is impacted by the demand for dollars which is affected by the real interest rate. Changes in the value of the dollar will impact both the price of exports as well as imports. Finally government purchases are the least sensitive to changes in the real interest rate.

If we look at the equation for money demand from Irving Fisher, which of the following statements is true?

There isn't an explicit role for the interest rate in the equation

Can central bankers set short-term interest rate targets and still control inflation in the long run or are these goals mutually impossible? Explain.

They can attain both goals. The monetary policy reaction curve shows that the central bankers can influence aggregate demand and, ultimately inflation by adjusting the real interest rate. In the long run, inflation is determined by money growth. The central bankers can alter their balance sheets and the monetary base in the short run to change the short-term real interest rate. Money growth on the other hand depends on the willingness of central bankers to expand their balance sheets for the long run.

quiz 20 For the Federal Reserve's balance sheet, the asset listed securities would include:

U.S. Treasury securities.

To an economist, the term "inflation" refers to:

a continually rising price level.

quiz 24 Short-run movements in inflation and output are ultimately attributed to changes in:

aggregate demand and aggregate supply.

quiz 22 The Taylor rule is:

an approximation that seeks to explain how the FOMC sets their target.

When the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check, when the check returns, the Fed's balance sheet will show:

an increase in assets and liabilities of $1 million.

A cause of the decline in the velocity of money during the 2007-2009 financial crisis was a result of:

an increase in uncertainty.

The monetary policy reaction curve:

approximates the behavior of central bankers.

quiz 22 Targeted asset purchases are:

asset purchases that shift the composition of the Fed's balance sheet.

quiz 20 Reserves are:

assets of the commercial banks and liabilities of the central bank.

When an individual withdraws funds from a checking account the:

bank's balance sheet shrinks but the size of the Fed's balance sheet is not affected.

The debate over the causes of recessions in the U.S. in recent years has included arguments about:

both monetary policy and higher oil prices.

quiz 24 The debate over the causes of recessions in the U.S. in recent years has included arguments about:

both monetary policy and higher oil prices.

Raising interest rates following the use of unconventional policy tools depend on

both the size and composition of the central bank's balance sheet and the toolbox available to the central bank.

Within the European Central Bank, banks with excess reserves:

can deposit them with the ECB and earn an interest rate below the target refinancing rate.

quiz 22 Within the European Central Bank, banks with excess reserves:

can deposit them with the ECB and earn an interest rate below the target refinancing rate.

quiz 22 The types of loans the Fed makes consist of each of the following, except: primary credit. seasonal credit. secondary credit.

conditional credit.

quiz 22 The key to the success of forward guidance as a monetary policy tool is:

credibility

quiz 20 A central bank's balance sheet will categorize the following as liabilities:

currency

Each of the following items would appear as assets on the central bank's balance sheet, except: loans. securities. foreign exchange reserves.

currency.

The economy is in both a short- and long-run equilibrium if:

current inflation equals expected inflation and current output equals potential output.

If the economy is in long-run equilibrium:

current inflation should equal expected inflation.

Mary decides to withdraw $500 out of her checking account. The impact of this transaction on the Banking System's balance sheet will be to:

decrease reserves and checkable deposits by $500 respectively.

quiz 20 During the 1990s, the money multipliers for M1 and M2:

decreased.

quiz 22 The European Central Bank's equivalent of the Fed's open market operations (OMO) is:

dissimilar to the Fed's OMO in that the operations are conducted at all 19 of the National Central Banks simultaneously.

Which of the following best completes the statement? If people increase their currency holdings, all else the same, the monetary base:

does not change but the quantity of M2 will decrease.

If money growth and real output growth are both zero, the change in the price level will:

equal the percentage change in velocity.

The Taylor rule allows the real long-term interest rate to:

fluctuate with the natural rate of interest.

During the 1990s many countries developed a monetary policy framework that focused on inflation targeting. This is an example of policymakers:

focusing directly on an objective.

quiz 20 A central bank holds foreign exchange reserves for:

foreign exchange interventions.

As a portion of total assets measured in billions of dollars, the least important asset on the Fed's balance sheet is:

gold

Nobel-laureate economist Milton Friedman suggested that policymakers strive to ensure that the monetary aggregates:

grow at a rate equal to the rate of real growth plus the desired level of inflation.

Central banks that have a hierarchical mandate with inflation targeting basically are saying:

hitting the inflation target comes first, everything else comes second.

The fact that there is a market for federal funds enables banks to:

hold a lower level of excess reserves than they would otherwise hold.

The slope of the monetary policy reaction curve is determined by:

how aggressively policymakers change interest rates in response to deviations between current and target inflation rates.

If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would:

increase the IOER.

A central bank's purchase of securities made by writing checks on itself will:

increase the size of their balance sheet.

During the Great Depression, the monetary base in the U.S.:

increased.

Which of the following statements best completes the sentence, "All other factors constant, as the nominal interest rate increases, the opportunity cost of money..."?

increases, the velocity of money increases, and the quantity of money people want to hold decreases.

From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was:

interest rates rose very high.

quiz 24 The dynamic aggregate demand curve illustrates that the relationship between inflation and real output is:

inverse

Consider the following ratio: the average annual inflation rate/the average annual money growth rate. If a country's rate of money growth consistently exceeds the rate of inflation the ratio would be:

less than one.

If reserve demand is volatile, in order for the central bank to keep interest rates from being volatile, it must:

let the quantity of reserves fluctuate.

Liabilities of commercial banks show up on the Fed's balance sheet as part of its:

loans

quiz 20 A central bank's balance sheet would categorize each of the following as liabilities, except: currency. the government's account. accounts of the commercial banks.

loans

Given the following formula for the Taylor rule: Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) Every one percent decrease in the rate of inflation will

lower the target federal funds rate by 1.5%.

In the late 1970s into the early 1980s, interest rates were high and very volatile. During this period:

money demand as well as velocity should have also been shifting and volatile.

Over the long run if central banks want to avoid high rates of inflation, they need to be concerned with the:

money growth rate.

During the early years of the Great Depression, the monetary base and M2:

moved in opposite directions; the monetary base increased but M2 decreased.

quiz 20 During the early years of the Great Depression, the monetary base and M2:

moved in opposite directions; the monetary base increased but M2 decreased.

quiz 24 Business cycles are viewed as:

movements in the short-run equilibrium.

Economic researchers have found:

no examples of countries with high rates of money growth and low inflation rates.

An open market sale of U.S. Treasury securities by the Fed will cause the Banking System's balance sheet to show:

no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.

Seasonal credit provided by the Fed is not as common as it used to be because:

other sources for long-term loans have developed for banks in seasonal areas.

quiz 22 The European equivalent of the U.S.'s market federal funds rate is called the:

overnight cash rate.

The long-run aggregate supply curve intersects the horizontal axis at the:

potential level of output.

Between 1970 and 2000, the Fed:

published targets for money growth and rarely hit them.

The formula for required reserves is:

rD.

quiz 24 The aggregate demand curve shows the quantity of:

real output demanded at each level of inflation.

quiz 24 Aggregate supply is the quantity of:

real output supplied at each level of inflation.

The ECB now frequently uses _____ to inject reserves into the banking systems of countries that use the Euro.

repurchase agreements

quiz 20 The monetary base is the sum of:

reserves and currency in the hands of the public.

quiz 20 As a portion of total assets measured in billions of dollars, the most important asset on the Fed's balance sheet is:

securities.

If an investor thinks interest rates are likely to rise, she would:

sell her bonds and hold more money.

Forward guidance is:

statements today about policy targets in the future.

Potential output of the country when viewed over long periods of time:

tends to rise over time.

quiz 22 The components of the formula for the Taylor rule includes each of the following, except: the target federal funds rate. the current inflation rate. the inflation gap.

the 30-year U.S. Treasury bond rate.

If the nominal interest rate decreases:

the cost of holding money decreases.

The money multiplier is much lower today than it was twenty-five years ago because:

the currency-to-deposit ratio is much higher today.

One thing the Fed has learned over the past twenty-five years is:

the money multiplier is unstable over time.

The opportunity cost of holding money is:

the nominal interest rate.

The portfolio demand for money reflects:

the portion of wealth people desire to hold in the form of money.

quiz 24 In the long run the inflation rate equals the level implied by:

the rate of money growth.

In the short run, the point on the aggregate demand curve where an economy will end up depends on:

the short-run aggregate supply curve.

quiz 24 In the short run, the point on the aggregate demand curve where an economy will end up depends on:

the short-run aggregate supply curve.

The conventional tools of monetary policy include:

the target federal funds rate range.

quiz 24 In the short run, the aggregate supply curve is:

upward sloping.

quiz 24 If output and inflation are unrelated in the long run, the long-run aggregate supply curve must be:

vertical

The Fed would use a reverse repo when they:

want to temporarily decrease the monetary base.