Study plan for Chapters 18, 12 & 16
Why would a fund's trade moving against it cause it to burn through its capital? A. Hedge funds are highly leveraged, and a margin is generally required for their trades. B.Capital serves as margin, so capital is used as a cushion between losses. C.Both A and B are correct.
C. both A and B are correct
How might imposing capital controls help to stop a decline in the value of the lira?
Capital controls would reduce the demand for foreign currencies, thereby increasing the value of the lira.
How can changes in the federal funds rate cause changes in long-term real interest rates?
Changes in the federal funds rate can change long-term real interest rates because short-term interest rates and long-term interest rates tend to rise and fall together.
Writing on his blog, former Fed Chairman Ben Bernanke noted: "Here is the trilemma in action: If China wants to use monetary policy to manage domestic demand and to simultaneously free up international capital flows, it may not be able to fix the exchange rate at current levels." What does Bernanke mean by "the trilemma"?
China cannot have exchange rate stability, monetary policy independence, and free capital flows at the same time
what is a lender of last resort? A.Is an entity that seeks to stop a bank failure from turning into a bank panic by making sure solvent institutions can meet their depositors' withdrawal demands. B.A lender of last resort is an institution that serves as an ultimate source of credit to which banks can turn during a panic. C. The Federal Reserve acts as a lender of last resort. D. All of the above.
D. all of the above
which of the following is true regarding the bursting of the housing bubble in the U.S economy A. Once housing prices started to fall, homeowners realized their mistake and began defaulting on their mortgages. B.Once housing prices started to fall, the banks that owned mortgaged-backed securities experienced losses. C.Many financial assets were based on the bet that housing prices would only increase. D.All of the above.
D. all of the above
what are capital controls?
Government-imposed limits on foreign investors buying domestic assets or domestic investors buying foreign assets
why would markets interpret this change as indicating that interest rates were likely to remain low for a very long time?
Historically, when the economy starts to recover from a recession, the Fed raises interest rates to limit that inflation.
Does greenspan's analysis provide insight into why the fed during his tenure may have been reluctant to take action against asset bubbles
If Greenspan believes that most bubbles burst without severe economic consequences, then, yes, it would explain the Fed's actions.
Which of the following could be a negative implication if the maturity of the debt is less than the maturity of the debt is less than the maturity of the assets it funds
If the debt is not renewed, or rolled over, the asset side of the balance sheet becomes unsustainable
In a paper written in April 2010, looking back at the financial crisis, former Fed Chair Alan Greenspan argued: At least partly responsible [for the severity of the financial collapse] may have been the failure of risk managers to fully understand the impact of the emergence of shadow banking that increased financial innovation, but as a consequence, also increased the level of risk. The added risk had not been compensated by higher capital. How did the emergence of shadow banking increase the risk to the financial system? (Check all that apply.)
In the event of a nonbank financial institution run, there is no equivalent of the FDIC. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even though, like traditional banks, they borrow short and lend long.
The late Allan Meltzer of Carnegie Mellon University once argued: I have yet to see a study that shows that sterilized intervention, the most common type of intervention used by the Fed in the foreign exchange markets, has any effect on the value of the dollar at all. What is a "sterilized intervention"?
It is a foreign exchange intervention where the central bank offsets the effect of the intervention on the monetary base.
An article in the Wall Street Journal observes that: "The dollar is an asset unlike any other for one reason: its position as the world's reserve currency." The article notes that the position of the dollar in the world financial system can cause problems for other countries by making "dollar-denominated debt more expensive to service in local markets. And it hurts foreign nations importing goods, which feeds inflation." In what sense is the dollar the world's reserve currency?
It is considered the world's reserve currency because the majority of international reserves are held in dollars.
What actions did the Fed take during the recession of 2020 that relied on its authority under Section 13(3) of the Federal Reserve Act?
It provided easy credit within the banking system along with providing funds directly to state and local governments by setting up credit and liquidity facilities.
What happened to the size of the default risk premium during the 2007-2009 and 2020 recessions?
It rose dramatically during both recessions, but the increase was much greater in 2007-2009 than in 2020.
An article on bloomberg.com quoted then Governor of the Bank of Canada Stephen S. Poloz as saying that the size of the multiplier for government purchases depended in part on "offsets such as upward creep in interest rates or movement in the exchange rate." How would an increase in interest rates in Canada affect the exchange rate between the Canadian dollar and other currencies?
It would increase the demand for Canadian dollars, thereby raising the exchange rate.
What would be the effect of this change in the exchange rate on the size of the multiplier?
It would lead to a drop in net exports, thereby lowering domestic income, causing the multiplier to be smaller.
would an increase in interest rates affect the size of the multiplier in other ways in addition to its effect on the exchange rate?
It would reduce investment and interest-sensitive consumption, further reducing the size of the multiplier.
How did the Federal Reserve rescue Bear Stearns? The Federal Reserve arranged a buyout of Bear Stearns by
JP morgan chase
is the dollar the only reserve currency
No, while the dollar is the dominant reserve currency, countries also hold the yen, the euro, and the yuan as reserves.
what are dollar denominated debts
Securities purchased by foreign central banks and private investors priced in U.S. dollars
We've seen that since the Fed first formally adopted an inflation target of 2% in 2012, inflation has persistently been below that target. We've seen that in the five years leading up to Covid-19, the FOMC forecast that the inflation rate would be higher than it turned out to be. If the FOMC had realized ahead of time that inflation was going to remain well below its 2% target most of the time, how might it have changed monetary policy compared with the policy that it actually used?
The Fed may have kept the federal funds rate low instead of raising it beginning in 2015.
In August 2020, during the Covid-19 pandemic, an article in the Wall Street Journal reported that the Fed was preparing "to effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation." The article noted that the policy change would be "a way of essentially telling markets that rates will stay low for a very long time. Markets have likely already picked up on this change, given the continued declines in long-term interest rates." Why had the Fed previously been following a policy of raising its target for the federal funds rate when it expected that inflation would rise in the future rather than waiting until inflation had actually risen?
The Fed wanted to head off that inflation rather than waiting until inflation rises and then trying to fix the problem.
What does it mean for the central bank of Turkey to "prop up the lira"? Why would the actions the central bank took to prop up the lira use up the bank's foreign-exchange reserves?
The central bank is looking to raise the value of the lira by selling foreign assets currently on its balance sheet
Why would the dollar serving as the "world's reserve currency" make it difficult for governments and firms in other countries that have dollar-denominated debts?
The cost of repaying the debt changes as the value of the dollar changes relative to the value of local currencies.
In his memoirs, published in 2014, former Treasury Secretary Timothy Geithner observed: "Eventually, Congress will have to make some tough choices about the mortgage market—not just how to reduce the government's dominant role, but how to balance the trade-off between safety and accessibility." In what sense does the government have a dominant role in the mortgage market?
The government implicitly guarantees Fannie Mae and Freddie Mac mortgage-backed securities.
Under the Bretton Woods system, what was devaluation?
The lowering of a currency's official value relative to the U.S. dollar
What was the economist likely referring to by "doesn't bode well for the U.S. balance of payments"?
This disparity means that the United States may become even more reliant on savings from abroad
Shortly after the Federal Reserve arranged the purchase of Bear Stearns by JPMorgan Chase, the Wall Street Journal recounted the events that led to the extraordinarily low price that JPMorgan paid for Bear Stearns: "The bank was mulling a price of $4 or $5 a share. 'That sounds high to me,' Mr. Paulson said. 'I think this should be done at a low price.'" Why did Treasury Secretary Paulson want Bear Stearns to sell for such a low price? (Check all that apply.)
To punish the firm's owners and managers for bad decisions, without letting them go bankrupt. In order to prevent systemic risk
An article on bloomberg.com observes that: "One often-used argument for a gold standard is that it disciplines governments, preventing them from printing a lot of paper money to pay their debts." What is the reasoning behind this argument?
Under the gold standard, a country would need to acquire additional gold to expand its money supply.
Evaluate the following argument: "The United States did not really leave the gold standard in 1933. Under the Bretton Woods system, the United States stood ready to redeem U.S. currency for gold at a fixed price, and that is the basic requirement of the gold standard." Which of the following regarding the above statement is true?
When the U.S. joined the Bretton Woods system, the quantity of gold did not determine the U.S. money supply.
John Maynard Keynes and John Hicks developed a model of the economy in which total output is determined solely by total spending with little or no consideration of the supply (production) side of the economy. Why would Keynes and Hicks writing during the Great Depression be likely to develop a model of the economy that focused only on total spending?
With the economy during the Great Depression way below potential in output and employment, the concern wasn't whether producers would produce, but whether households and firms would spend
Is it possible for the United States to run a balance-of-payments deficit?
Yes, it is possible to run a deficit if the official settlements balance is excluded from the financial account
n describing the bank panic that occurred in the fall of 1930, Milton Friedman and Anna Schwartz wrote: A contagion of fear spread among depositors, starting from the agricultural areas, which had experienced the heaviest impact of bank failures in the twenties. But such contagion knows no geographical limits. What do the authors mean by a "contagion of fear"?
a bank run that is fueled by fear of bank failure
what are the two main ways in which the government can keep one bank failure from leading to a bank panic?
a central bank can act as a lender of last resort, and the government can insure deposits
What is a sovereign debt crisis? A sovereign debt crisis occurs when ________.
a country has difficulty covering the interest or principal payments on its government issued bonds
IS curve
a curve that shows the combinations of the real interest rate and aggregate output that represent equilibrium in the market for goods and services
What is a "foreign exchange market intervention"? What are a central bank's "international reserves"? Foreign exchange market intervention is when there is ________ exchange rates. International reserves are ________.
a deliverate action by the central bank to influence; central bank assets denominated in a foreign currency
An article in the Wall Street Journal discussing the possibility that Greece might leave the eurozone observed that: "Traditionally, devaluations are viewed as providing a short-run spur to growth." Why might the Greek economy experience an increase in growth following a departure from the eurozone?
a depreciation of currency to stimulate exports
All of the following are reasons why Greece might still choose to remain in the eurozone despite any possible benefits, except:
a likely appreciation of drachmas
In their book This Time Is Different, Carmen Reinhart and Kenneth Rogoff conclude: "An examination of the aftermath of severe postwar financial crises shows that they have had a deep and lasting effect on asset prices, output, and employment." Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial crisis?
a recession that includes a financial crisis is generally more complex and has more severe consequences, such as decreasing asset prices and lending, which economy for a longer time period than a traditional recession
what is Okun's law?
a statistical relationship between the output gap and the cyclical rate of unemployment
What do economists mean by an "exchange rate regime"? By an "exchange rate regime," economists mean ________.
a system a country chooses for adjusting exchange rates and flows of goods and capital among countries
Why would a government want its currency to be weaker? Don't countries prefer to have strong currencies?
a weaker currency means the prices of its exports will be lower in terms of other countries' currencies thereby raising net exports
What does it mean to say that there is a bubble in the housing market? A bubble means that
asset prices have increased beyond the point that could be jusitfied by fundamental evaluation
Monetary policy that changes interest rates in order to affect borrowers' net worth and spending decisions.
balance sheet channel
What role did the bank panics of the early 1930s play in explaining the severity of the Great Depression?
bank panics exacerbated the effect of the great depression by making residential and commercial loans more difficult to get, which further reduced economic activity
In academic research published before he entered government, Fed Chairman Ben Bernanke wrote: [In] a system without deposit insurance, depositor runs and withdrawals deprive banks of funds for lending; to the extent that bank lending is specialized or information sensitive, these loans are not easily replaced by nonbank forms of credit. What does it mean to say that bank lending is "information sensitive"?
banks acquire information to decide if borrowers are creditworthy
why would bank lending being information sensitive make it difficult to replace with nonbank forms of credit
banks have economies of scale or some other advantage in evaluating the riskiness of loans
why might a country impose capital controls
because currency crises are fueled in part by sharp inflows and outflows of financial investments
Which of the following are advantages of pegging? (Check all that apply.)
A check against inflation reduced exchange rate risk
An article in the New York Times published just after the Fed helped to save Bear Stearns from bankruptcy noted: If Bear Stearns failed, for example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions. Why did Bear Stearns almost fail? (Check all that apply.)
because lenders lost faith in bear's ability to pay back short term loans because lenders declined to renew bear's short term loans because bear liquidated assets in order to pay back short term loans
What happens to the output gap during a recession? During a recession the output gap _____________
becomes negative
In a paper written in April 2010, looking back at the financial crisis, former Fed Chairman Alan Greenspan wrote: Some bubbles burst without severe economic consequences, the dotcom boom and the rapid run-up of stock prices in the spring of 1987, for example. Others burst with severe deflationary consequences. That class of bubbles ... appears to be a function of the degree of debt leverage in the financial sector, particularly when the maturity of debt is less than the maturity of the assets it funds. What does Greenspan mean by "debt leverage"?
borrowing and purchasing assets with borrowed funds
does Bernanke's observation help explain the role bank panics played in the severity of the great depression? A. When thousands of banks failed, it became difficult for their customers to obtain credit, thus exacerbating the severity of the Great Depression. B. No, Bernanke's observation doesn't help to explain the role bank panics played in the severity of the Great Depression. C. Yes, Bernanke's observation helps to explain the role bank panics played in the severity of the Great Depression. D.Both A and C are correct.
both a and c are correct
To reduce the foreign exchange value of its currency, would a central bank buy or sell foreign assets? What would be the effect on the monetary base? What would be the effect on domestic interest rates? To reduce the foreign exchange rate, the central bank would ____- foreign assets, which would________ the monetary base and _______ domestic interest rates
buy; raise; reduce
In describing the performance of the Federal Reserve during the Great Depression, former Federal Reserve Chairman Ben Bernanke has written: "The Fed proved far too passive during the Depression. It was ineffective in its role of lender of last resort, failing to stop the runs that forced thousands of small banks to close ...." A lender of last resort is a _______ that acts as the ultimate source of credit to _____________, making loans to solvent banks against their _________ illiquid, loans
central bank, the banking system, good, but
Monetary policy that impacts banks' ability to lend to bank-dependent borrowers.
commercial bank lending channel
n the 1790s, Alexander Hamilton, the secretary of the Treasury, urged Congress to agree to pay off the bonds that state governments had issued to finance expenditures during the American Revolution. An opinion columnist in the Wall Street Journal notes that Hamilton's proposal, which Congress adopted, "instantly won the new nation global credibility." What kind of credibility was the columnist likely referring to? The columnist was likely referring to the United States' ________
credibility in fully honoring all of its sovereign debr
Distinguish between the types of transactions recorded in the current account and those recorded in the financial account. The _____ account records transactions of currently produced goods and services, and the _______ account records transactions of existing financial or real assets.
current; financial
Suppose that a U.S. firm buys 13 BMW autos for $30,000 each. How is this transaction recorded in the balance-of-payments accounts for the United States? The purchase of the 13 BMW autos would be recorded in the _______ account as a $ _______- payment to _______ which is recorded as a ______ number
currnet; 390,000; foreigners; negative
A larger value for the MPC would tend to ____________ the stability of the economy because it would lead to ________ fluctuations in consumption
decrease, higher
If the Fed sells $15 billion of foreign assets, what happens to the Fed's holdings of international reserves and to the monetary base? The Fed's holdings of international reserves ___ by $15 billion, and the monetary base ____ by $15 billion
decrease; decreases
Why might a fund's dumping its positions cause prices to be destabilized? Prices of what? Because such large positions are being sold, it _____ the prices of ________
decreases; assets the fund holds
if nominal interest rates remain unchanged during a period of deflation, then when inflation rates are _______, the real interest rate in the economy will _________
decreasing, increase
What problems might the Fed face when it has difficulty determining whether current circumstances in financial markets and the economy actually are "unusual and exigent"? What problems might it face in having difficulty determining whether circumstances were no longer "unusual and exigent"? If the Fed has difficulty determining if current circumstances are "unusual and exigent," it may _________________
delay important policy actions
What is the difference between a devaluation and a depreciation? A __________ refers to a drop in the value of a currency in a flexible exchange rate system, whereas a __________ refers to a drop in the official fixed exchange rate in a fixed exchange rate system.
depreciation; devaluation
Explain whether you agree with the following argument: Potential GDP is the level of real GDP attained when all firms are producing at capacity. Firms have the capacity to operate 24 hours per day if they have to, but they rarely do. Therefore, because firms can almost always produce much more output than they actually do, real GDP is almost always well below potential GDP. agree or disagree
disagree
The Fed buys $4.0 billion in German government bonds, denominated in euros, and, at the same time, conducts an open market sale of $4.0 billion of U.S. Treasury securities. What happens to the monetary base? Is this a sterilized or an unsterilized foreign exchange intervention? The monetary base
does not change; sterilized
When the Federal Reserve lowers the real interest rate, does the economy move up or down the IS curve, and does the value of the output gap increase or decrease? When the Fed lowers the real interest rate, the economy moves _____ the IS curve and the value of the output gap __________
down, increases
If the intervention were successful, would it take more units of foreign currency to buy a U.S. dollar or fewer units? A weakening of the dollar means the measure of foreign currency per dollar would _______ so it would take _____ units of foreign currency to buy a dollar
fall; fewer
the debt deflation process is the process of ___________ that can increase the severity of an economic down turn
falling asset prices
n 2020, two articles in the Wall Street Journal discussed the decline in the value of the Turkish lira in exchange for the euro and the U.S. dollar. One article noted that: "President Recep Tayyip Erdogan has been under pressure to prop up the currency, because a rapid drop would add to the costs of foreign currency debt for Turkish banks and companies." The other article reported that: "The central bank has . . . used up much of its foreign-exchange reserves to prop up the currency." And: "Analysts and investors are concerned that Turkey may now look to impose partial capital controls . . . to try to stabilize the market." Why would a decline in the lira "add to the costs of foreign currency debt for Turkish banks and companies"? A decline in the lira means that each lira can be exchanged for ________units of the foreign currency. This means that as the value of the lira declines, it takes ____________ lira to pay off existing foreign currency debt.
fewer; more
Later, the German company uses the money to buy a $390,000 U.S. Treasury bond at a Treasury auction. How is this transaction recorded in the balance-of-payments accounts for the United States? The purchase of the U.S. Treasury bond would be recorded in the _____ account as a $________ receipt from _______ which is recorded as a ______ number
financial; 390,000; foreigners; positive
What is pegging?
he decision by a country to keep the exchange rate fixed between its currency and another country's currency.
What did bank depositors have to fear in the early 1930s?
if a bank failed, then depositors would potentially lose all their moeny
The financial writer Sebastian Mallaby observed about hedge funds that: ... leverage also made hedge funds vulnerable to shocks: If their trades moved against them, they would burn through thin cushions of capital at lightning speed, obliging them to dump positions fast—destabilizing prices. What does a hedge fund's trades "moving against it" mean? "Moving against it" means that
if a hedge fund bets one way and the price moves another away it has to exit the position fast
The classic account of bank panics was published in 1879 by Walter Bagehot, editor of the Economist, in his book Lombard Street: "In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them." All of the following are reasons why one bank failure might lead to many bank failures, except:
if multiple banks have to sell the same assets, the prices of those assets are likely to rise
How would the Fed carry out a sterilized intervention in the foreign exchange market? (Check all that apply.)
if the fed purchased foreign assets, it would also sell u.s treasury secruities if the fed sold foreign assets, it would also buy u.s treasury securities
What does Greenspan mean that "the added risk had not been compensated by higher capital"? In order to compensate for the risk, Greenspan believes that nonbank financial institutions should have voluntarily
increased their capital
The Fed changes the real interest rate, which affects the components of aggregate expenditure, thereby changing the output gap and the inflation rate.
interest rate channel
A column in the Wall Street Journal notes that "every heavily indebted country weighs the cost of repaying debt against the loss of confidence and creditworthiness that default entails." whose confidence is the country afraid of losing?
investors
why wouldn't a sterilized intervention have any effect on the value of the dollar
it does not change domestic interest rates
how did this change in the default risk premium affect the MP curve and the output gap?
it shifts the MP curve up and decreases the output gap
Why would this type of global credibility be particularly important to a relatively underdeveloped country, as the United States then was?
it showed that the United States was low risk as a borrower, allowing for lower interest rates on sovereign debt
was deflation during the early 1930s good or bad for firms
it was bad for firms that were borrowers because it effectively raised interest rates
As of 2020, the federal government was only beginning to take steps to reduce its role in the mortgage market. Why has moving away from the current system proven to be difficult politically?
it would increase mortgage interest rates and reduce the accessibility of mortgages
If a country runs a current account surplus, are its exports of goods and services larger or smaller than its imports of goods and services? If a country runs a current account surplus, its exports of goods and services are _________ than its imports of goods and services
larger
The consequences of losing investor confidence will most likely result in a ______ credit rating and _____ interest costs
lower, higher
Why might China be unable to fix its exchange rate if it is using an expansionary monetary policy and allowing free capital flows? An expansionary policy would _____ interest rates and ________ the demand for Chinese financial assets, causing the exchange rate value of the yuan to __________
lower; decrease; fall
What is the connection between a fund's being highly leveraged and its having a "thin cushion of capital"? Leverage _____ a trading position, ____ the ratio of capital to assets. This _____ both gains and losses and ______ the capital "cushion" for losses
magnifies, reducing, magnifies, reduces
What are "capital requirements"? What purpose do they serve? Capital requirements describe the ________ amount of capital a bank can hold. They are put in place to ________, resulting in a more ________ banking industry.
minimum; limit moral hazard in banking; stable
Fiscal stimulus was necessary in mid-2020 since at the time the output gap was ___________-
negative
Use the IS-MP model to discuss whether the U.S. economy can experience inflation and slack at the same time. Inflation can occur if there is a _________. if this increases inflation expectations then slack can be created as __________
negative supply shock causing the phillips curve to shift up, real interest rates rise causing MP to shift up
A columnist writing in the Wall Street Journal observed: "Franklin D. Roosevelt's March 1933 inaugural line 'that the only thing we have to fear is fear itself' was inspiring, but wrong. There was plenty to fear, not least the deflation that then gripped the nation." Prices fall when a country experiences deflation, so isn't deflation good for consumers?
no borrowers would be hurt by the higher real interest rates and higher real value of debts that deflation causes
why had markets responded in a way that caused long term interest rates to decline? A. If the chance of higher inflation is reduced, then investors will require a lower term premium. B.If markets expect that long-run inflation will be lower than previously expected, then long-term interest rates will fall. C.Markets realized that the FOMC had been consistently overstating and missing its 2% inflation target. D.Only A and B are correct. E.All of the above are correct.
only A and B are correct
What is the "output gap"? the "output gap" is the gap between real GDP and ________
potential GDP
Does this process provide any insight into why the Federal Reserve rescued Bear Stearns? A debt-deflation process
pushes down the price of those assets which other investment banks hold, thus worsening their balance sheets, which in turn can accelerate bankruptcies would occur if bear stearns goes bankrupt and has to sell its assets
What is the trade-off between safety and accessibility with respect to home mortgages? Stricter safety requirments will _____________ the accessibility of mortgages to potential homebuyers.
reduce
How does the government's role in the mortgage market affect that trade-off? By guaranteeing mortgage-backed securities like Fannie Mae and Freddie Mac, the government _______ the risk to financial firms and ____________ mortgage interest rates, which ______ the accessibility of mortgages
reduces, reduces, increases
nonbank forms of credit
refer to credit from providers other than banks
When the Federal Reserve changes the real interest rate to affect the output gap and inflation rate, the bank lending channel and the balance sheet channel _______ the effect of the change in the real interest rate
reinforce
How can Okun's law be used to derive an output gap Phillips curve? The output gap Phillips curve can be derived from the unemployment Phillips curve by
replacing the unemployment gap (cyclical unemployment) with the output gap equivalent (Y/2) from Okun's law
What does a fund's "dumping its positions" mean? (Check all that apply.)
selling before capital runs out selling before a margin call
Why did Congress write into Section 13(3) that the Fed could only take these actions under "unusual and exigent circumstances"? Congress wants the Fed to ________. This will encourage firms and government entities to ________ and will help avoid ________.
serve as the lender of last resort; act in a safe manner; moral hazard
Monetary policy designed to impact the ability of money market mutual funds to purchase commercial paper issued by firms
shadow bank lending channel
Economist John Cochrane of Stanford's Hoover Institution notes that supporters of Modern Monetary Theory (MMT) argue that inflation only occurs when the economy has no "slack." But he asks, "Did not the 1970s see stagflation, refuting [the] assertion [of supporters of MMT] that inflation comes only when there is no 'slack'"? What is economic slack in terms of the output gap?
slack occurs when there is a negative output gap
Would you expect the bank lending channel of monetary policy to have a larger or a smaller effect in emerging economies, such as Brazil or India, than in the United States? The bank lending channel of monetary policy has a _____ effect in the U.S than in emerging economies
smaller
all of the following are reasons why the fed didn't take action to rescue insolvent banks, except
some fed officials didn't think the problem was as bad as it was
What is the difference between a sterilized foreign exchange intervention and an unsterilized foreign exchange intervention? with ___ foreign-exchange intervention, the central bank offsets the effect of the intervention on the monetary base. with ______ foreign-exchange intervention, the central bank does not offset the effect on the monetary base.
sterilized unsterilized
If it has difficulty determining whether circumstances are no longer "unusual and exigent," it may ______________
stop policies too early or upset congress for overstepping its authority
Chapter 17 discussed whether the Federal Reserve and the government should attempt to "fine-tune" the economy—smooth almost every fluctuation in GDP or inflation—with stabilization policy, or, instead, should focus on long-run objectives, such as low inflation or steady economic growth, and restrict the use of activist policy to fighting major downturns in the economy. The reality that the Fed and the government must rely on "real-time data" that is subject to revisions _______________ the argument against fine-tuning the economy with activist stabilization policy.
strengthens
In July 2020, during the Covid-19 pandemic, an article on barrons.com reported that in testifying before Congress in July 2020 during the Covid-19 pandemic, former Fed chairs Ben Bernanke and Janet Yellen "called for Congress to provide more fiscal stimulus to the U.S. economy." What is "fiscal stimulus" and why was it called for in mid-2020? Fiscal stimulus includes expansionary ___________________
tax or spending policies implemented by the federal government
What is the difference between a "liquidity facility" and a "credit facility"? A credit facility is when ________, while a liquidity facility is when ________.
the Fed aggressively uses the repo market to provide credit within the banking system; the Fed provides funds to nonfinancial firms through loans or bond purchases
An article in the Wall Street Journal in 2019 reported that "President Trump and his economic advisers discussed a proposal to intervene in foreign-currency markets to weaken the U.S. dollar but ultimately decided against such an action." How could the United States intervene in foreign-currency markets to weaken the U.S. dollar?
the United states could increase the supply of U.S dollars by buying foreign assets
what is a default risk premium
the additional yield that an investor requires for holding a bond with some default risk
Why might an economist consider what happened during 2007-2009 to be a financial crisis but not the events of 2020? The 2007-2009 recession was the result of ________, while the 2020 recession was the result of ________.
the crash of the housing market; a once in a lifetime pandemic with social distancing measures
An article in the Wall Street Journal published in 2020 during the Covid-19 pandemic noted that: "The U.S. usually runs a deficit in goods and a surplus in services such as medical care, higher education, royalties and payments processing." The article noted that the pandemic was having a large negative effect on U.S. exports of services but having a much smaller effect on U.S. imports of manufactured goods. It quoted an economist at a consulting firm observing that this result "doesn't tend to bode well for the U.S. balance of payments because we tend to export a lot of services and import a lot of goods." In which component of the balance-of-payments account would U.S. exports of services and imports of manufactured goods appear?
the current account
Why would the dollar serving as the world's reserve currency make it difficult for countries importing goods, and why might those countries experience higher inflation as a result? Because of the dollar's role as an international reserve currency, ________.
the dollar may appreciate in value, making imports denominated in dollars more expensive, resulting in inflation
What is "contagion"? What role does it play in bank panics? Contagion is when ________.
the failure of one bank causes runs on other banks. if multiple banks experience bank runs, the result is a bank panic
how might the fed have stopped the bank runs during the early 1930s?
the fed could have lent money insolvent banks
Why might former Fed Chairs Bernanke and Yellen have believed that in 2020 fiscal stimulus was necessary rather than a more expansionary monetary policy?
the fed had already moved the target federal funds rate to near zero and had few policy options avaliable
which of the following is a reason that the Federal reserve failed to intervene to stabilize the banking system in the early 1930s?
the fed was reluctant to rescure insolvent banks, believing that doing so would encourage risky behavior by bank managers (the moral hazard problem)
what policy actions did the federal reserve take during the financial crisis
the federal reserve helped JPMorgan chase acquire bear stearns
Financial crisis typically results in a recession for all of the following reasons EXCEPT?
the government is unwilling to intervene during a financial crisis
Which of the following steps would not need to be taken to reduce the government's role in the mortgage market?
the government would need to stop charging fannie mae and freddie mac fees
what is the relationship between the MPC and the multiplier?
the larger the MPC the larger the multiplier
What do economists mean by the "channels of monetary policy"? By the "channels of monetary policy," economists are referring to ________.
the ways in which monetary policy can affect output and prices
In the following situation, briefly explain whether the short-run Phillips curve with the unemployment rate on the horizontal axis will shift, and if it does shift, in which direction it will shift: The actual inflation rate increases.
this would cause a movement up along the short - run phillips curve
In the following situation, explain whether the IS curve will shift and, if it does shift, in which direction it will shift: The federal government cuts the corporate profit tax.
this would shift the IS curve to the right
Why did the Fed decide to use both during 2020? The Fed used both ________.
to maintain a flow of funds through the financial system so banks and governments could still function as needed
What is the controversy over China's pegging the value of the yuan? The value of the yuan is _____ making chinese exports _________ and imports into china _________-
undervalued; cheaper; more expensive
Under a gold standard, for the world as a whole, inflation
was possible from gold discoveries that increased the world money supply
Why were countries hesitant to pursue a devaluation? (Check all that apply.)
B. Because the governments had to face political charges that their monetary policies were flawed. C. Because it wiped out a portion of the value of financial assets denominated in the domestic currency.
How do central banks use official reserve assets? (Check all that apply.)
B. To make international payments to conduct international monetary policy. C. To make international payments to settle the balance of payments.
what do the authors means that "such contagion knows no geographical limits"
Bank panics may start in an isolated area, but the fear they engender quickly spreads to banks elsewhere.
How does deposit insurance encourage banks to take on too much risk?
Banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses
do depositors today face similar fears?
Because FDIC insurance did not exist in the early 1930s, depositors today do not face similar fears.
what are capital controls
C. Government-imposed restrictions on foreign investors buying domestic assets. D. Government-imposed restrictions on domestic investors buying foreign assets.
The United States hasn't been on the gold standard since 1933. What has prevented the United States from "printing a lot of paper money to pay its debts" in the years since? Printing paper money to pay its debts can be ________ for the country, and it ________.
inflationary; angers lenders who are receiving devalued currency in repayment
what are the disadvantages of imposing capital controls
A. heightened reluctance of multinational firms to expand operations in countries with capital controls. C. Impetus is given to the formation of a black market for the currency so entities can evade the capital controls. D. Increased government corruption with bribes to government officials.
Why was the decision by the Fed to orchestrate the purchase of Bear Stearns so controversial? (check all that apply)
A.Because, according to some economists, the action increased moral hazard in the financial system. C. Because the Fed intervened by brokering a guaranteed deal with JP Morgan. E.Because Bear Stearns is an investment bank, as opposed to a commercial bank, and, as such, policymakers faced unexpected challenges.
What are official reserve assets? (Check all that apply.)
A.Gold that central banks hold and use in making international payments. B. Government securities that central banks hold and use in making international payments. D.Special Drawing Rights that central banks hold and use in making international payments.
How is being a lender of last resort connected to the too-big-to-fail policy? (Check all that apply.)
A. The too-big-to-fail policy and the lender of last resort strive to prevent systemic risk, where the failure of a few firms leads to the widespread failure of solvent banks. B. The too-big-to-fail policy and the lender of last resort have to provide liquidity to banks during bank panics.
How did the gold standard operate? (Check all that apply.)
A. Trade deficits led to gold outflows and a decrease in the money supply, and trade surpluses led to gold inflows and an increase in the money supply. D. The quantity of gold held by a country determined its money supply, and gold served as official reserves.
Name three downsides to a government imposing capital controls.
A. capital controls may lead to increased corruption. B. Multinational firms may be hesitant to locate in countries with capital controls. C. Capital controls may lead to the development of black markets for the currency.
