Econ Ch 15

The Feds are shooting for what rate of inflation and unemployment?

2% inflation & Natural unemployment

Monetary policy is conducted by the U.S. Treasury Department.

FALSE

Since World War II, the Federal Reserve has not been involved in carrying out monetary policy.

FALSE

The Fed can directly lower the inflation rate.

FALSE

Monetary policy refers to the actions the

Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives.

Ceteris paribus, an increase in the money supply will lower short-term interest rates.

TRUE

Inflation rates during the years 1979-1981 were the highest the United States has ever experienced during peacetime.

TRUE

One of the monetary policy goals of the Federal Reserve is price stability.

TRUE

The money market model is essentially a model that determines the short-term nominal rate of interest.

TRUE

What is a banking panic, and what role did banking panics play in the decision by Congress to establish the Federal Reserve?

When the Fed was founded, its primary responsibility was to make discount loans to banks in order to deal with the bank panics, which occurred when many banks suffered from large withdrawals by depositors.

Which of the following will lead to a decrease in the equilibrium interest rate in the economy?

a decrease in GDP

Which of the following would cause the money demand curve to shift to the left?

a decrease in real GDP

An increase in the interest rate causes

a movement up along the money demand curve.

In the figure above, the movement from point A to point B in the money market would be caused by

an open market sale of Treasury securities by the Federal Reserve.

For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the

federal funds rate

The interest rate that banks charge other banks for overnight loans is the

federal funds rate.

The top policy goal for Paul Volcker when he became chairman of the Federal Reserveʹs Board of Governors in 1979 was

fighting inflation

Monetary policy refers to the actions the Federal Reserve takes to manage

he money supply and interest rates to pursue its economic objectives.

he goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of ________, it also can achieve the goal of ________ simultaneously.

high employment; economic growth

An increase in the demand for Treasury bills will

increase the interest rate on Treasury bills.

Increases in the price level

increase the quantity of money needed for buying and selling.

Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should

increase.

Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to

increase.

Using the money demand and money supply model, an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

increase.

An increase in real GDP

increases the buying and selling of goods and increases the demand for money as a medium of exchange.

An increase in the interest rate

increases the opportunity cost of holding money.

If the probability of losing your job remains ________, a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time.

low; lowers

The money demand curve has a negative slope because

lower interest rates cause households and firms to switch from financial assets to money.

Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often

lowers interest rates during recessions.

Rising prices erode the value of money as a ________ and as a ________.

medium of exchange; store of value

The Federal Reserveʹs two main ________ are the money supply and the interest rate.

monetary policy targets

An increase in real GDP can shift

money demand to the right and increase the equilibrium interest rate.

When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have

more money than they want to hold.

The money demand curve has a

negative slope because an increase in the interest rate decreases the quantity of money demanded.

The money demand curve, against possible levels of interest rates, has a

negative slope.

When the Federal Reserve System was established in 1913, its main policy goal was

preventing bank panics.

Federal Reserve Board Chairmen Paul Volcker, Alan Greenspan, and Ben Bernanke all have focused on which of the following as their main goal of monetary policy?

price stability

Which of the following are goals of monetary policy?

price stability, economic growth, and high employment

The Federal Reserve Systemʹs four monetary policy goals are

price stability, high employment, economic growth, and stability of financial markets and institutions.

During the turmoil in the market for subprime mortgages in 2007 and 2008, the Fed increased the volume of discount loans. The goal of the Fed was to

reassure financial markets and promote financial stability

The Fed seeks to promote stability of financial markets because

resources are lost when there is not an efficient matching of savers and borrowers

When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to

sell Treasury bills.

Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates.

sell; up

The Federal Reserve can directly affect its monetary policy ________, which then affect its monetary policy ________

targets; goals

The money supply curve is vertical if

the Fed is able to completely determine the money supply.

Hovnanain Enterprises, a residential home builder based in New Jersey, did well during the mid-2000s but did not do so well in during and immediately after the recession of 2007-2009. The reason for this is

the Fed kept low interest rates in the mid-2000s but by 2007 the housing bubble had burst.

The monetary policy target the Federal Reserve focuses primarily on today is

the interest rate.

An increase in the price level causes

the money demand curve to shift to the right.

The Fedʹs two main monetary policy targets are

the money supply and the interest rate.

List the Fedʹs four main monetary goals.

1. Price stability 2. High employment 3. Stability of financial markets and institutions. 4. Economic growth

Suppose the Fed increases the money supply. Which of the following is true?

At the original interest rate, the quantity of money demanded is less than the quantity of money supplied.

In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will

buy Treasury bills.

An increase in the money supply will

decrease the interest rate.

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

decrease.

When the price of a financial asset ________ its interest rate will ________.

falls; rise