ECON 2101 Chapter 15

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

A decrease in GDP.

Contractionary monetary policy on the part of the Fed results in

A decrease in the money​ supply, an increase in interest​ rates, and a decrease in GDP.

An increase in the interest rate causes

A movement up along the money demand curve.

As the interest rate​ increases,

Consumption, investment, and net exports​ decrease; aggregate demand decreases.

Monetary policy refers to the actions the

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

Expansionary monetary policy refers to the​ ________ to increase real GDP.

Federal​ Reserve's increasing the money supply and decreasing interest rates.

The 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

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

Increase.

An increase in the interest rate

Increases the opportunity cost of holding money.

John Maynard Keynes is said to have remarked that using an expansionary monetary policy to pull an economy out of a deep recession can be like​ "pushing on a​ string."

Increasing reserves and lowering interest rates may not stimulate economic activity if banks​ don't lend and businesses​ don't borrow.

Which of the following is a monetary policy target used by the​ Fed?

Interest rate.

The federal funds rate

Is the rate that banks charge each other for​ short-term loans of excess reserves.

The Fed uses policy targets of interest rate​ and/or money supply because

It can affect the interest rate and the money supply directly and these in turn can affect​ unemployment, GDP​ growth, and the price level.

What do economists mean by the demand for​ money?

It is the amount money-currency and checking account deposits-that individuals hold.

What is a​ "subprime mortgage," and would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit​ history?

Loans granted to borrowers with flawed credit​ histories; a higher interest rate.

Why is the Fed sometimes said to have a​ "dual mandate"? The Fed is said to have​ a" dual​ mandate" because

Maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946.

What is the advantage of holding​ money?

Money can be used to buy​ goods, services, or financial assets.

What is the disadvantage of holding​ money?

Money, in the form of currency or checking account​ deposits, earns either no interest or a very low rate of interest.

The Federal​ Reserve's four goals of monetary policy are

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

Which one of the following is not one of the monetary policy goals of the​ Fed?

Reduce income inequality.

To reassure investors who were unwilling to buy mortgages in the secondary​ market, the U.S. Congress used two government sponsored​ enterprises, Fannie Mae and Freddie​ Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac

Sell bonds to investors and use the funds to purchase mortgages from the banks.

An increase in interest rates affects aggregate demand by

Shifting the aggregate demand curve to the​ left, reducing real GDP and lowering the price level.

Why would securitization give mortgage borrowers access to a deeper pool of​ capital?

Since banks could resell mortgages to​ investors, they had access to more funds than just their own deposits.

What are the​ Fed's main monetary policy​ targets?

The money supply and interest rates.

If the Fed believes the inflation rate is about to​ increase, it should

Use a contractionary monetary policy to increase the interest rate and shift AD to the left.

If the Fed believes the economy is about to fall into​ recession, it should

Use an expansionary monetary policy to lower the interest rate and shift AD to the right.

What two institutions did Congress create in order to increase the availability of mortgages in a secondary​ market?

​"Fannie Mae" and​ "Freddie Mac"