Econ 304 Final Exam
If the federal government passes another stimulus package, then US Treasury bond demand will rise since the Treasury is will be issuing more bonds.
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If you buy a bond, you hope interest rates on that bond fall so that you can realize a capital gain by selling the bond for a higher price than you bought it for.
true
If you think interest rates are going to fall in the future then you should buy bonds now, before interest rates fall.
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In a deflationary environment, real interest rates are positive even if nominal interest rates are zero (0%).
true
"2 percent is not enough" refers to the idea that the Fed can buy more bullets by raising r*.
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According to the Fed's new policy regime, they really don't care what the unemployment rate is since the Phillips curve is currently flat indicating there is no relationship between inflation and unemployment.
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According to the Fed's new regime, unemployment cannot go too high but in can go too low.
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According to the Taylor Principle, if inflation falls by 1%, then the Fed must lower nominal interest rates by less than 1% so that real interest rates fall, thereby stimulating aggregate demand.
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An increase in wealth (a), all else constant, will shift the savings function to the right.
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Currently, the inflation rate is slightly higher than the Fed would like it to be. Part of the reason is due to the recent rounds of quantitative easing.
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During the new economy, the term p (rho), the last term in the expression for the short-run Phillips curve below, rose, shifting the short-run Phillips curve to the left.
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If actual inflation is higher than expected inflation then real wages are higher than expected enticing workers to work more (substitute away from leisure towards work). This is depicted by a movement up and along the short-run aggregate supply curve.
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If the Fed announces, through forward guidance, that short term interest rates will remain low for the next three years, that should lower rates for the three year GS interest rate, but have no effect on the five year GS interest rate.
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If we were to characterize the new economy with the labor market, we would shift the labor demand curve to the right because of technology and capital rising (A and K) and we would also shift labor supply to the right, since so many workers were making wealth in the stock market.
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If x (the little x in front of r ) in the equation below rises, all else constant, the IS curve will get steeper, implying that monetary policy is getting less powerful in terms of influencing aggregate demand.
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One reason the Fed wants inflation to rise is due to the fact that higher inflation results in higher real interest rates (the Fisher effect) and thus, higher inflation will give more bullets to the Fed to fight a recession.
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Shortly before the breakdown of the Bretton Woods system, the US $ become undervalued and thus, member countries were desperate to convert their gold into US $. As a response, President Nixon abandoned the Bretton Woods system in 1971. Since then, the US $ remains the world's reserve currency.
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Sterilization is a process where the Fed offsets previous open market operations by buying Government Securities. The fear was that there were not enough government securities to buy. This is the main reason why the Fed pleaded with Congress to grant them the authority to pay interest on reserves.
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Suppose the Fed is in their new regime where they are targeting average inflation at 2%. Suppose the current price index (the PCE, the target price index) is 132. Four years from now, the target price index is between 140 and 141.
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Suppose the US is running a trade deficit with China. Now suppose that China goes in a recession, that is, their output falls. This is the only change. As a result, the US trade deficit with China will get larger, assuming the US was running a trade deficit with China originally.
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Suppose the interest rate on a one year government security in January of 2019 is 2.58%. Also, suppose the CPI price index is 252.55 in January of 2019 and 258.82 in January of 2020. Calculate the ex-post real rate of interest. True or false: The ex-post real rate of interest is negative (less than zero).
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Suppose you have the following information regarding the cost of living the following 2 PA counties • Bradford, $20,300 • Bucks, $35,600 If you make $100,000 in Bucks county, then to achieve the same purchasing power as in Bradford, you would need to make between $58,000 and $59,000 in Bradford county.
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The BNP episode from August of 2007 is an example illustrating how the Fed needed to respond to shocks to reserve demand in an attempt to achieve it's federal funds rate target. In this episode, the Fed reacted by conducting open market sales to keep the federal funds rate from rising above target.
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The Fed lowered rbar, the discretionary part of monetary policy during the Great Recession. According to our model, this would shift the IS curve and the AD curve to the right.
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The Fisher effect is consistent with the Taylor rule...... when inflation rises, the Fed reacts by raising nominal interest rates - this positive relationship between inflation and nominal interest rates is referred to as the Fisher effect.
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The article on forward guidance suggests that the Fed could have done a better job if the Fed would have only put a date on their forward guidance earlier. One way that the authors' measured the effectiveness of forward guidance was to measure the reaction of various interest rates to news..... the more the reaction to the news, the more effective the forward guidance.
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The income effect for labor supply implies that the labor supply curve is positively sloped - the higher the wage, the higher the labor supply.
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The steeper the MPK curve the steeper the savings function.
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The steeper the investment demand function the more powerful monetary policy. This implies that the MPK curve is steep as well.
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The volume of trades in the federal funds market is very large now given all the quantitative easing the Fed has been conducting since March of this year (2020).
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To derive the aggregate demand curve we use the short-run Phillips Curve and Okun's Law.
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We argued that the concept of "crowding out" is alive and well in the US economy. That is, when government spending goes up, real interest rates rise crowding out consumption and investment.
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We looked at long term interest rates in the rest of the world and found that most all long term nominal interest rates on government securities in the rest of the world are higher than the long term interest rates in the US. This implies that quantitative easing is working better in the US than the rest of the world.
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We saw that the expansionary fiscal policy from January 2009 was not only passed but it also worked better than expected in terms of lowering the unemployment rate in the US economy.
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When I was a child I was happy earning $1 for a days work - let's say it was in August 1968. Using the most recent CPI index (August 2020), that 1 $ back in August 1986 would be equivalent to over $10 today!
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When the Fed conducts quantitative easing they buy US Government Securities which increases the supply of US Government Securities and thus, lowers interest rates on these US Government Securities.
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In lecture, we noted that the interest rate on 1 year Government Securities in the US is 1.5% meaning that a $1000 face value government security currently costs $998.50.
false .15% interest rates on gov securities
NAIRU is defined as the highest the unemployment rate can go without inflation accelerating.
false NAIRU is the lowest unemployment can go without inflation accelerating
The reason the bond demand curve slopes downward is due to the fact that as prices fall, so do interest rates and thus the government/firms are willing to borrow more, given lower interest rates.
false as prices fall interest rates go up, therefore they want to buy more
Currently, the inflation rate is slightly higher than the Fed would like it to be. Part of the reason is due to the recent rounds of quantitative easing
false the inflation rate is extremely low at the moment
The Fed better be careful with the amount of quantitative easing they are currently conducting since last time they conducted quantitative easing (during the Great Recession), the excessive money growth resulted in high inflation
false the relationship between money growth and inflation has disappeared, we are not worried about inflation right now
If you buy a bond, you hope interest rates on that bond rise so that you can realize a capital gain by selling the bond for a higher price than you bought it for.
false you would need interest rates to fall for bond prices to rise when trying to sell it
A positive shock to the production function, such as in the New Economy, resulted in the production function shifting up and the long run aggregate supply curve shifting to the right.
true
According to the Taylor Rule, if inflation rises above target by 1 %, then the Fed should raise the federal funds rate by 1.5% so that real interest rates rise.
true
An increase in financial frictions (f), all else constant, will shift the IS curve and the AD curve to the left.
true
Bernanke made an arguement that a Global Savings glut is part of the reason why the US can run a large trade deficit even though long term real interest rates remain low
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Current estimates of r* are less than 1 % meaning that the current neutral federal funds rate, given an inflation target of 2%, is less than 3%.
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During the beginning of the Great Recession, right after the Fed hit the zero bound, the Fed could have done better with their forward guidance - that is, the Fed should have put a date on their forward guidance rather than using vague terms like "for sometime" and "for an extended period"
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Given the Fed's new regime, they basically admitted that for the time being at least, NAIRU does not exist.
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Given the Fed's recent change in regime, the stock market is even more in love with the Fed!
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Given the Fisher equation, the more control the central bank has over inflation and inflationary expectations, the more control they have over real rates of interest, and thus, more control over the economy, all else constant. This is one reason why so many central banks explicitly target inflation.
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Given the pandemic shock, the unemployment rate in the US rose to its highest level in over 70 years!
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Given the system before the Fed got the authority to pay interest on reserves, if reserve demand is higher than expected, then the federal funds rate will be higher than target.
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If MPN rises above the real wage then the firm should hire more workers.
true
If a country's absorption = C + I + G is greater than its income Y, then the that country is running a trade deficit.
true
If quantitative easing works well, the increase in demand for US GS will raise their price and drive investors into corporate bond market / stock market.
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If savings is greater than investment at some real interest rate call it r', then the real interest rate must fall to clear the goods market (in a closed economy).
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If the Fed decided to stop paying interest on reserves then the money supply should rise, all else constant. The reason would be due to a higher money multiplier.
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If there is an increase in the demand for bonds for company ABC, then interest rates on ABC bonds will fall, all else constant.
true
If you buy a US Treasury bond, you hope interest rates on that bond fall so that you can realize a capital gain by selling the bond for a higher price than you bought it for. This would be a good strategy if you knew that the Fed was going to conduct quantitative easing before they announced it.
true
In an open economy assuming two large countries, like we do in class, if China's investment function falls, say due to negative animal spirits, all else constant, the US trade deficit will rise, assuming the US was running a trade deficit before the shock.
true
In lecture we showed that real wages were rising in the US during the beginning of the internet, in the mid 1990s, since the growth rate in nominal wages was greater than the growth rate in the general price level.
true
In lecture, we noted that the interest rate on 1 year Government Securities in the US is 0.15% meaning that a $1000 face value government security currently costs $998.50.
true
Income taxes and savings are positively related.
true
Lower interest rates are typically good for the stock market since lower interest rates, all else constant, raise the present value of futures earnings.
true
Lower interest rates are typically good for the stock market since lower interest rates, all else constant, results in investors substituting away from bonds towards stocks.
true
NAIRU is defined as the lowest the unemployment rate can go without inflation accelerating. Recently, given the change in monetary policy, the Fed is no longer worried about unemployment rates going too low.
true
One of the main reasons why the US $ is the international reserve currency is due to the Bretton Woods agreement that occurred shortly after WWII. In this system, the US $ was pegged to gold and all the participating countries then tied/pegged their currency to the US $.
true
One reason the Bretton Woods currency arrangement broke down is that the US printed money which increased the amount of $ circulating in the world. As a result, the $ became overvalued and the demand for gold rose so high that Nixon decided to abandon the currency arrangement in 1971.
true
One reason the Fed abandoned using money growth as an intermediate target is due to the fact that velocity became unstable due to financial innovations.
true
One reason the Fed created the reverse repo facility was to put a floor on the Federal Funds Rate. That is, Government Sponsored Enterprises (GSE's) will not accept an interest rate lower than the rate on reverse repos.
true
One reason the Fed wants inflation to rise is due to the fact that higher inflation results in higher nominal interest rates (the Fisher effect) and thus, higher inflation will give more bullets to the Fed to fight a recession.
true
One reason the money multiplier fell during the Great Depression was due to bank runs - households 'running' to the banks to withdrawal their cash before the banks fail. We don't need to worry so much about that now given the existence of FDIC insurance.
true
One way quantitative easing is supposed to stimulate the economy is due to the fact that quantitative easing results in higher bond prices which will drive investors into the stock market. In fact, this notion is consistent with the lover letter that the stock market wrote to the Fed
true
One way quantitative easing is supposed to stimulate the economy is due to the fact that quantitative easing results in higher bond prices which will driver investors into the stock market. In fact, this notion is consistent with the lover letter that the stock market wrote to the Fed
true
One way to explain the movement along the aggregate demand curve during the new economy is the following: Given a surplus, inflation falls and the Fed, following the Taylor Principle, lowers nominal rates by enough to lower the real rate of interest which stimulates consumption, investment, and net-exports.
true
Secular stagnation is an argument consistent with a low r*.
true
Suppose you have the following information on the cost of living in two PA counties: • Crawford, $20,000 • Cumberland, $24,400 If we declare Crawford the base county, then the price index in Cumberland county would be 122, meaning that it is 22% more expensive to live in Cumberland county relative to Crawford county.
true
TINA stands for :There Is No Alternative" and helps explain why the US Government bond market is rallying.
true
The Beige book is published before each FOMC meeting and is used by policymakers to assess the economic conditions across the US.
true
The Fed has recently been suggesting that fiscal policy makers need to do more since the Fed has pretty much ran out of bullets.
true
The Fed is currently conducting quantitative easing by buying Government Securities every month.
true
The Phillips curve getting flatter over the years explains why the Fed is no longer worried about the unemployment rate getting below NAIRU.
true
The Phillips curve has flattened over recent decades. This flattening of the Phillips explains, in part, the Fed's notion that NAIRU is currently non-existent since a flat Phillips curve implies no relationship between unemployment and inflation.
true
The implementation lag for monetary policy is always shorter than it is for fiscal policy.
true
The money multiplier fell during the Great Recession which was a good thing since it kept a lid on money supply growth. We explained this using an excel worksheet where the monetary base rose by more than 100% but the money supply was relatively well behaved. This reality began right when the Fed got the authority to pay interest on reserves, thus, giving the Fed unlimited balance sheet capacity
true
The neutral federal funds rate rose during the new economy given the rise in productivity growth during this time. In fact, the opposite is true today. That is, one reason the neutral federal funds rate is low now is due to low productivity growth.
true
The positive supply shocks experienced during the new economy were so strong that inflation actually trended downwards, even though we had very low rates of unemployment and high rates of economic growth.
true
The reason a firm's bond supply curve slopes upward is due to the fact that as bond prices rise, interest rates fall and thus, firms have more of an incentive to borrow given that more investment projects pass the cost - benefit test.
true
The reason that bond the demand curve slopes downward is due to the fact that as bond prices fall, all else constant, other assets become relatively more expensive, so that investors substitute away from these relatively more expensive assets towards the bond prices that are falling.
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The reason the bond demand curve slopes downward is due to the fact that as prices fall, interest rates rise and thus, all else constant, bonds become more attractive relative to substitutes and thus, people buy more of them.
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The way the Fed targets the federal funds rate has changed dramatically since the Fed received the authority to pay interest on reserves. The reason that the old system won't work is due to the fact that there are so many excess reserves in the system.
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We argued that the Fed has less power now, relative to the onset of the Great Recession since longer term interest rates are lower now that they were in the beginning of the Great Recession
true
We argued that the Fed has less power now, relative to the onset of the Great Recession since longer term interest rates are lower now that they were in the beginning of the Great Recession. This is one of the reasons that the Fed is hoping / suggesting that more expansionary Fiscal Policy is needed.
true
We argued that the quantity theory of money is dead in the US. That is, there has not been a significant relationship between money growth and inflation for many years. In fact, we looked at a graph showing some very high periods of money growth with seemingly no impact on inflation.
true
We argued that the short-run Phillips curve for the US is currently flat. This being the case, the short-run aggregate supply curve is also flat.
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We learned from the Great Recession that forward guidance works better when you put a date on the forward guidance, rather than being vague about it.
true
When the Fed conducts quantitative easing they buy US Government Securities which increases the demand of US Government Securities and thus, lowers interest rates on these US Government Securities.
true
he recent change in Fed policy is consistent with the Fed trying to buy more bullets to fight the next recession. The idea is that if inflation rises and inflationary expectations rise, so will nominal interest rates, which will give the Fed more power to fight the next recession.
true