Macro final
Environmental degradation argument
: States that coun- tries producing mass goods allow their environments to deteriorate. However, studies show that as countries develop and incomes grow, demand for environmental protection rises.
The United states has
A comparative advantage in both soybean product and comercial aircraft production
What is a piggyback mortgage?
A mortgage for which the down payment is borrowed
Which of the following scenarios would make monetary policy the most difficult to address?
A worldwide spike in oil prices resulting in higher production costs
Which policy action would be appropriate when the actual federal funds rate is below the target federal funds rate?
A. The Federal Reserve would buy bonds from banks. B. The Federal Reserve would sell bonds to banks.
Which entity was a primary issuer of credit default swaps?
AIG
Suppose that the central bank increases interest rates in an economy. How would this affect aggregate demand and inflation?
Aggregate demand would fall and inflation would fall.
Vault cash
Cash kept on hand in a depository institution's vault to meet day-to-day business needs, such as cashing checks for customers; can be counted as a portion of the institution's required reserves.
______ means that one country has a lower opportunity cost of producing a good than another country.
Comparative advantage
Increase in SRAS
Congress passes an investment tax credit that will lower the cost of business acquiring new production equipment
In which situation would contractionary monetary policy be most effective?
Consumer confidence is very strong, leading to a record holiday shopping season despite fewer discounts being offered.
If the United States and China entered into a free trade agreement, abolishing all tariffs and quotas, who would benefit and who would lose in the United States?
Consumers of Chinese imports would win, American workers competing against Chinese goods would lose.
Real output has decreased and the price level has decreased.
Decrease in AD
Real output has decreased and the price level has increased.
Decrease in SRAS
Which of the following is an example of the Fed making monetary policy?
Decreasing the discount rate to 2%
After an economy begins to recover, suppose that the Fed quickly raises interest rates back to the level seen before the recession in order to prevent inflation from occurring. Which type of Fed policymaker would be more likely to have taken this action?
Hawks
Increase in AD
Households feel more optimistic about the future because stock prices increase, thereby creating an enhanced sense of wealth dor households owning stock portfolios
Real output has increased and the price level has increased.
Increase in AD
R eal output has increased and the price level has decreased.
Increase in SRAS
Decrease in AD
Increased concern about the viability of social security households to save more
During the Great Recession that began in 2007, the Fed lowered interest rates to almost 0%. What did it do to accomplish this policy
Increased the money supply.
Suppose that the economy is currently below its long-run equilibrium output. Which of the following is an example of monetary policy that can help put the economy back toward equilibrium?
Increasing the money supply to reduce interest rates to encourage more spending and investment.
6. What is included in the national debt but is not part of the public debt?
Intergovernmental transfers
Which of the following is TRUE of the Federal Reserve System?
It has the power to increase the money supply.
How does a quota affect prices in the domestic market?
It increases the price of the product above the world market price.
Which of the following is TRUE of the Federal Reserve System?
It is subject to oversight from Congress.
If the economy is experiencing high rates of inflation due to a new housing bubble, what effects would expansionary monetary policy have on the economy?
It would reduce inflation but cause unemployment to rise.
Which economists believe that fiscal policy is effective, while monetary policy may be ineffective?
Keynesians
What are the twin goals of the Federal Reserve Bank?
Low unemployment and stable prices.
equation of exchange
M * V = P * Q any change in the money supply (M) results in a change in prices (P)
M2=
M1 + "NEAR MONIES" (saving accounts, money market deposit accounts, small denomination time deposits, and money market mutual fund accounts)
_____ is (are) the buying and selling of U.S. government securities.
Open market operations
Suppose that Snowboardland imposes a tariff on all winter clothing imported from Skiland. Who would benefit from this tariff and who would lose?
Producers of winter clothing in Snowboardland would benefit but consumers would lose.
Which two government programs are automatic stabilizers?
Progressive income tax and unemployment compensation
Countries usually impose restrictions on free foreign trade to...
Protect domestic producers
Which of the following actions by the Fed would be most likely to stimulate the economy?
Purchasing bonds on the open market.
A tariff and import quota will both
Reduce the quantity of imports and raise the domestic price
Which of the following is an example of expansionary monetary policy?
The Fed increasing the money supply to push interest rates lower
Which of the following is a provision of the Federal Reserve Act or subsequent legislation that weakens the independence of the Federal Reserve?
The Federal Reserve System is subject to Congressional oversight.
Which of the following statements is correct?
The Federal Reserve is considered to be an independent central bank.
If a country allows trade and the domestic price of a good is higher than the world price,
The country will become an importer of the good
What is the discount rate?
The interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank.
Classical theory assumes that two variables represented in the equation of exchange are constant. What are they?
The velocity of money and real output
What typically will happen as a result of the Federal Reserve selling U.S. Treasury securities on the open market?
The volume of bank reserves will decrease, causing M1 to decrease.
Decrease in SRAS
There is an increase in safety-related government regulation of business.
When the Federal Reserve sells bonds, what is likely to happen to interest rates?
They will increase.
The US is importing down pillows. The world price of these pillows is $25. the US imposes a $10 tariff on pillows. The US is a price taker in the pillow market. As a result of the tariff...
US consumers of pillows will lose and US producers will gain
autarky
a country that does not engage in international trade, also known as a closed economy
24. An autarky is
a country that does not trade at all.
The federal funds rate is
a market-determined interest rate that banks pay on overnight loans between one another.
Pushing on a string is
a metaphor for the limits of monetary policy and the impotence of central banks. Monetary policy sometimes only works in one direction because businesses and households cannot be forced to spend if they do not want to.
FOMC announcements now include
a statement about expected interest rate changes or other monetary manipulations in store for the medium-term future, roughly one to two years out.
An import tariff
a tax on imported goods
A subprime mortgage is
a type of mortgage that is normally issued by a lending institution to borrowers with low credit ratings. As a result of the borrower's lower credit rating, a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan.
9. If the current federal funds rate is below the target federal funds rate, what Fed policy action would be an appropriate response?
a. The Fed would sell bonds to banks.
In monetary economics, the equation of exchange is
an economic equation that showcases the relationship between money supply, velocity of money, the price level and an index of expenditures.
A trade quota
an explicit limit on the quantity of imports
net worth
assets - liabilities
Contractionary monetary policy _____ consumption and _____ investment spending.
decreases; decreases
Expansionary monetary policy _____ interest rates and _____ aggregate demand.
decreases; increases
bank liabities
deposits
When the Federal Reserve sells bonds
deposits at the Fed are erased in the banking system, which will tighten competition for those funds and cause the actual federal funds rate to rise.
the terms of trade
determine the prices of imports and exports
Comparative advantage arises from
differences in opportunity costs between two countries
The Fed
has employed forward guidance as a way of signaling its policy intentions to markets.
the process of making a loan
increase the money supply
trade
is a positive sun game, which mean that both countries in a trading relationship can gain compared to not trading
The infant industry argument...
is based on the belief that protecting industries when they are young will pay off later
the main tool of traditional monetary policy
is closely tied with the federal funds rate.
Quantitative easing
is designed to increase excess reserves and the money supply, and ultimately reduce interest rates to stimulate the economy and expand income and employment
The Community Reinvestment Act
is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations.
A macroprudential monetary policy
is less of a tool for stabilization policy and more of a tool for financial security.
A macroprudential monetary policy
is one that takes into account the stability of the financial system as a whole.
The velocity of money
is usually measured as a ratio of gross national product (GNP) to a country's total supply of money.
When the FOMC announces its intended policy direction for the next six months to one year,
it is engaged in providing forward guidance.
expansionary monetary policy
more money---> lower interest rate ---> higher C, I, G and (X-M) increase in aggregate demand and output
the main tool of traditional monetary policy is
open market operations.
what happens to the foreign market when a tariff is imposed
residual demand
M1
the narrowest definition of money that measures highly liquid instruments including Currency(banknotes and coins) and demand deposits (checking account)
The velocity of money is
the rate at which money is exchanged from one transaction to another. It also refers to how much a unit of currency is used in a given period of time.
Forward guidance is
the term used by central banks to communicate what their future monetary policy will be. By using forward guidance, banks aim to calm uncertainty in markets and corporations.
Under a macroprudential monetary policy, decisions would more likely be made
to preserve the existence of financial institutions, rather than to meet targets for interest rates, inflation rates, and the level of employment.
"Hawks" are economists who argue that:
too much monetary policy can have inflationary effects.
5. A government's economic policy is fiscally sustainable if
. the present value of expected government revenues covers the present value of expected government expenses.
How many regional Federal Reserve Banks are there in the United States?
12
Protection against cheap labor argument:
Argues domestic workers need to be protected from cheap foreign labor. Most economists estimate that the ben- efits from lower-priced imports from free trade exceed the costs of lost employment. Further, increased trade generates jobs in export industries.
Exploitation of foreign workers argument:
Argues that trading with developing countries where wages are low and working conditions are deplorable exploits workers in these countries. But restricting trade would probably do more harm than good. Trade may be their only chance to grow and mprove their standard of living
Reduce the quantity of imports and raise the domestic price
Brazil will become an exporter of rubber
If Brazil imposes a tariff on imported American oranges, who would benefit the most?
Brazilian orange growers and the Brazilian government
Which of the following groups benefit from import quotas?
Domestic producers and foreign consumers.
If the economy has just experienced a severe recession, which type of Fed policymaker would be more focused on a quick recovery?
Doves
Which of the following is a monetary policy tool that is meant to reduce interest rates and stimulate the economy?
Easy money
Suppose that after five solid years of economic growth, Eurekaland begins to experience inflationary pressures due to strong consumer and investor confidence. If Eurekaland's Central Bank wants to prevent inflation from becoming a major problem, which of the following actions should it take?
It should reduce the money supply to push interest rates higher.
What happens to long-run aggregate supply when there is an increase in the money supply?
It stays the same.
Suppose that for every cupcake that Jack bakes, he gives up producing two brownies. And for every brownie that Jill bakes, she gives up producing 3 cupcakes. According to comparative advantage, what should Jack and Jill be producing?
Jack should bake brownies and Jill should bake cupcakes
27. South Korea and Japan both manufacture televisions. If Japan has a comparative advantage over South Korea in production of televisions, then it is also true that
Japan can produce televisions at a lower opportunity cost than South Korea can.
Key industries argument:
States that a country must be able to rely on its domestic industries for critical goods such as food, oil, steel, and defense equipment in times of conflict when trade might not be possible.
Which of the following is an example of a tariff?
Switzerland taxes the imports that it receives from France
Which school of economic thought is most closely associated with calls for monetary rules to guide monetary policy decisions?
The Monetarist school
What was TARP?
The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector
The US is importing down pillows. The world price of these pillows is $25. the US imposes a $10 tariff on pillows. The US is a price taker in the pillow market. As a result of the tariff...
The US price of pillows will be $35 and the quantity of pillows purchased will decrease
According to Keynesians and monetarists, in the short-run, what happens to the aggregate price level when the money supply increases?
The aggregate price level rises.
Which transaction would decrease the excess reserves of the bank?
The bank buys a Treasury bond from the Fed
Which transaction decreases the net worth of a bank?
The bank recognizes that some of its loan are not collectible.
When a commercial bank buys a bond from the Federal Reserve, the bank's balance sheet will reflect an increased asset value for U.S. Treasury Bonds. What other balance sheet entry is made simultaneously?
The bank's deposits at the Fed will decrease.
When a country allows for trade and becomes an exporter of the good, which of the following would NOT be true?
The losses of domestic consumers exceed the gains of domestic producers
Federal funds market
The market in which banks can borrow or lend reserves, allowing banks temporarily short of their required reserves to borrow reserves from banks that have excess reserves.
How did Milton Friedman define permanent income?
The present value of an individual's future stream of income
If the United States were to export more of its supply of natural gas, what would happen to the price of natural gas in the United States?
The price of natural gas would rise in the United States.
Which of the following is a function that is performed by the Federal Reserve?
To clear checks.
The Federal Reserve Act of 1913 tasked the central bank with which of the following purposes?
To establish more effective supervision of the banking system in the United States.
15. What is the Federal Reserve's dual mandate?
To promote maximum employment and price stability
Which of the following is an argument for restricting trade?
Trade restrictions are necessary for economic growth
29. Concerning the antidumping argument against free trade, which one of the following is NOT correct?
U.S. consumers are hurt when foreign-made household goods are dumped in the US.
If the United States imposes a tariff on textiles made in Egypt,
U.S. textile manufacturers will benefit.
Suppose Japan and South Korea can both produce the same amount of cars per worker, but Japan can produce more satellite dishes per worker. Does South Korea have a comparative advantage in either good?
Yes, South Korea would have a comparative advantage in producing cars.
If a Canadian lumber company can produce more plywood per worker than an American lumber company, should the United States be an exporter of plywood?
Yes, the United States should export plywood if the opportunity cost is lower than producing another good.
In the Volcker regime change, the Federal Reserve
abandoned its policy of trying to control interest rates and instead adopted a policy of setting a stable rate for the growth of bank reserves.
1. A rightward shift of short-run aggregate supply causes
an increase in real output and a decrease in the price level
the Fed targets the fedelral funds rate
an interest rate that influences nearly all other interest rate . the federal funds rate was near 0% from 2008 to 2015
A collateralized debt obligation is
are financial tools that banks use to repackage individual loans into a product sold to investors on the secondary market. These packages consist of auto loans, credit card debt, mortgages or corporate debt.
open market operations
buying and selling government securities to target the federal funds rate
The Fed can pursue an expansionary monetary policy by
buying bonds from banks in open market operations.
An unconventional loan or non-conforming loan or FHA loan,
can be obtained through a bank or private lender. The FHA has helped millions of homeowners purchase property who would have been otherwise unable to do so. These loans are ideal for lower-income borrowers or those with less than perfect credit.
M1 consists of
currency in circulation and checking account deposits.
Higher interest rates:
decrease consumption and investment spending.
Chaletland should _____ interest rates during a recession and _____ interest rates during an economic boom in order to maintain long-run equilibrium
decrease; increase
When the Federal Reserve buys bonds,
deposits at the Fed are created to pay for the bonds, thereby putting downward pressure on the federal funds rate.
higher interest rates
discourage additional investment spending
When a country increases its imports of clothing:
domestic producers of clothing will lose but consumers will benefit
antidumping argument
dumping ocurs when a foreign
Lower Interest rates
encourage additional investment spending,
reserve requirement
establishing the minimum level of reserves banks must hold
The Federal Reserve buying government bonds is considered:
expansionary monetary policy.
the country with the lower price is likely to
export the good, greater demand for that country's good pushed prices higher.
3. If an expansionary fiscal policy shifts aggregate demand to the right, short-run aggregate supply will eventually shift to the left. This leftward shift occurs when
firms realize that their costs of doing business have increased.
19. Going "below the zero lower bound" means
forcing interest rates to become negative.
The Federal Open Market Committee oversees the buying and selling of:
government securities.
Compared to free trade, a market with a tariff will have a _____ level of domestic production and a _____ level of dead weight loss.
higher; higher
liquidity refers to
how fast, easily, and reliably and asset can be converted into cash
A bank is solvent
if it has a positive net worth.
A bank is liquid
if it has sufficient assets to be converted to cash to cover the withdrawals on any given day.
what happens to the domestic market when a tariff is imposed?
impact of a tax on the market
the country with the higher price is likely to
import the good: lesser demand for that country's good pushes prices lower
According to monetarists, an increase in the money supply:
in the long-run will only increase prices.
Lower interest rates:
increase consumption and investment spending.
Open market operations (transactions of U.S. Treasury securities between banks and the Federal Reserve) are used to
influence the level of deposits at the Fed in the banking system as a whole.
The liquidity trap occurs when
interest rates are so low that increases in the money supply have little, if any, effect on interest rates, investment, and aggregate demand.
contractionary monetary policy
less money--> higher interest rates---> lower C, I, G and (X-M) Decrease in aggregate demand and output.
A quota is a
limit on the quantity of imports.
16. The Community Reinvestment Act of 1977 required banks to
make loans in the neighborhoods where their depositors reside.
three primary functions of money
medium of exchange unit of account store of value
In a liquidity trap:
monetary policy is ineffective in changing income and output.
Classical economists held the view that
money is neutral.
30. The claim that key domestic industries must be protected even in peacetime to ensure that they are ready if called upon during a crisis is known as the
national defense argument.
f the Fed chooses to sell bonds on the open market, it is attempting to:
raise interest rates using contractionary monetary policy.
The zero lower bound
refers to the conventional wisdom that nominal interest rates cannot fall below zero, even though real interest rates often are below zero.
If the Federal Reserve increases the supply of money in the market, then bond prices will _____ and interest rates will _____.
rise; fall
Credit Default Swap (CDS)
s a financial swap agreement that the seller of the CDS will compensate the buyer (usually the creditor of the reference loan) in the event of a loan default (by the debtor) or other credit event.
The Fed can pursue a contractionary monetary policy by
selling bonds to banks in open market operations
discount rate
setting the interest rate at which banks can borrow from the feed
Contractionary monetary policy:
shifts the aggregate demand curve to the left.
Cost-push inflation arises from
short-run aggregate supply shifting to the left.
Deposits at the Fed are created when
the Fed buys bonds from banks.
deposits are erased when
the Fed sells bonds to banks.
when countries trade many commodities, the terms of trade are defined
the average price of exports divided by average price of imports ( Pe/Pi)
The maximum value of a loan a bank can make depends most directly on
the bank's level of excess reserves.
When the level of deposits at the Fed increases,
the federal funds rate decreases because there is less competition to borrow reserves
When the level of deposits at the Fed decreases
the federal funds rate increases.
Neutrality of money is
the idea that a change in the stock of money affects only nominal variables in the economy such as prices, wages, and exchange rates, with no effect on real variables, like employment, real GDP, and real consumption.
The federal funds rate is
the interest rate on loans of reserves from one bank to another
A nominal interest rate is
the interest rate that does not take inflation into account.
A real interest rate is
the interest rate that does take inflation into account
a capital cushion.
the level of net worth banks need to maintain
The phenomenon that interest rates may be so low that increases in the money supply will have no impact on aggregate demand is called:
the liquidity trap.
bank assets include
vault cash deposits at the Fed loans U.S. Treasury bonds
liquidity trap
when interest rates are so low, people hold on to money rather than invest in bonds due to their expectations of a declining economy or an unforeseen event such as war
