ECO 4223 - Money and Banking

If people hold $4000 in checking deposits and $1000 in currency, the currency-deposit ratio is

0.25 (1000/4000)

If the neutral real interest rate is 3%, the output gap is -1%, the target inflation rate is 2%, the actual inflation rates is 1%, and the coefficients for the output gap and inflation differential both equal 1, the real interest rate prescribed by Taylor's rule is

1% ( Taylors formula is 3% + 1(1) + 1(12) = 1%.)

If the currency-deposit ratio is 0.20 and the reserve-deposit ratio is 0.20, the money multiplier is

3 (The money multiplier is 1 + the currencydeposit ratio divided by the sum of the currencydeposit ratio and the reservedeposit ratio (=1.2/0.4).)

If Taylor's rule prescribes a real federal funds rate of 4% and a nominal federal funds rate is 8%, the expected inflation rate must be

4% ( The nominal federal funds rate prescribed by Taylors rule is the real rate plus the expected rate of inflation.)

A countercyclical policy that offsets an adverse expenditure shock is

a reduction of real interest rates. (An adverse expenditure shock shifts the AE curve to the left. A cut in the real interest rate offsets this type of shock, while all other listed policy actions offset a positive expenditure shock.)

The expenditure shock that shifts the AE curve to the left is

a tax increase

An increase in the target federal funds rate reduces investment for all of the following reasons except the fact that the increased federal funds rates causes

an appreciated exchange rate.

If monetary policy in an AE/PC model with time lags is made using Taylor's rule, an adverse supply shock results is

an immediate increase in the real interest rate, with output falling one year later and inflation falling two years later.

The current policy of the Federal Reserve System is to have

an implicit inflation target.

If a surprise increase in the target federal funds rate causes market participants to expect additional increases in the target rate, the effect of the increase of the target rate on short-term interest rates will be

an increase greater than the announced increase in the target rate.

Investment will increase when

asset prices increase firms' net worth.

A tightening of monetary policy by the Fed reduces investment because

banks reduce lending.

The component of aggregate expenditure that is not affected by a change in the real interest rate is

government purchases

If Taylor's rule prescribes a real interest rate below the neutral rate, the economy is

in a recession. (A prescribed real interest rate below the neutral rate is due to a negative output gap (a recession) or inflation below the target rate of inflation.)

If the target value for the money supply is above the current value, a central bank would

increase the money supply.

An reduction of the real interest rate in the AE/PC model

increases output and inflation. (A lower real interest rate increases output along the AE curve, and higher output increases inflation along the Phillips curve.)

A reduction in the reserve-deposit ratio

increases the money multiplier and the money supply. (Reducing the reservedeposit ratio reduces the leakage from the deposit creation process and increases the money multiplier and the money supply.)

Under a policy of interest-rate targeting, an increase in aggregate spending

increases the money supply. (Interest rate targeting requires adjusting the money supply to maintain the interest rate at the target value. An increase in aggregate spending increases money demand, requiring an increase in the money supply to keep the interest rate constant.)

If the central bank follows an accommodative monetary policy when an adverse supply shock occurs

inflation increases and output remains constant. (An accommodative policy holds the real interest rate constant, so output remains unchanged, but the adverse supply shock increases inflation.)

A argument favoring zero inflation is that

inflation's interaction with the tax system discourages saving

A policy based on Taylor's rule can be described as

leaning against the wind.

If the Fed desires to increase the money supply it would

lower the discount rate.

If Federal Reserve officials give speeches signaling that they intend to increase the target federal funds rate at their next meeting

market interest rates will increase before the meeting.

The Fed's goal of maximum sustainable output growth is most consistent with its goal of

maximum employment. (natural employment)

According to Okun's law, when unemployment increases by 1%

output falls by 2%. (Okuns law describes the inverse relationship between output and unemployment. A 1% increase in unemployment is associated with a 2% decrease in output)

Adaptive expectations of inflation are based upon

past inflation

A factor that could change the natural rate of unemployment is

productivity growth. (The natural rate is unaffected by business cycles and the factors causing cycles. Productivity growth affects firms ability to meet wage demands, thereby affecting the natural rate of unemployment.)

An open-market sale of bonds

reduces the monetary base and the money supply.

A stock market crash

reduces wealth and shifts the AE curve to the left.

To increase the federal funds rate the Fed would

sell bonds in the open market. (To increase the federal funds rate the Fed must reduce the money supply which is accomplished by selling bonds in the open market.)

The Fed reduces the monetary base when it

sells a bond for $1000. ( A contractionary open market sale that reduces the monetary base involves selling bonds to the public.)

The Federal Reserve's goals include

stable prices. ( stable prices, moderate longterm interest rates, maximum employment (natural unemployment) and maximum sustainable growth.)

The long-run result of a nonaccommodative policy in response to an adverse supply shock

temporarily increases the interest rate and temporarily reduces output to hold inflation constant.

A surprise cut in the target federal funds rates lowers other interest rates by more than the direct effect of the cut in the 1-day interest rate because

the cut in the federal funds rate reduces expected future interest rates

The investment multiplier is the

the effect of firms' earnings on investment.

An argument favoring stabilizing output is that

the losses in output and employment in recessions exceed the gains in booms.

When actual output equals potential output

the rate of unemployment equals the natural rate of unemployment.

When banks increase their holdings of excess reserves

the reserve-deposit ratio increases.

Inflation will fall when

unemployment increases (according to Phillip's curve, inflation falls when output falls or unemployment increases)

A countercyclical policy response to a positive expenditure shock when there are time lags

will reduce output in a future year.