Macro Week 7-9

In the short-run, Monetary policy can affect ____ while in the long-run, it affects ______

aggregate demand and output, inflation

In the LR, output is determined which curve?

aggregate supply

To measure the "core" inflation rate, the Bureau of Economic Analysis uses a price measure that

excludes food and energy prices because the prices of these items can be volatile

Unconventional monetary policy, followed during and after the financial crisis and recession 2007-present includes

expanding open market purchases and the money supply even when short-term interest rates are zero, purchase of assets other than government bonds, providing 'forward guidance' about future short-term interest rates to influence expectations of future long-term interest rates

In the LR, output is determined by

factors of production: capital, labor, technology

What are the sources of sticky wages?

fixed wage contracts, minimum wage laws, workers and firms want to avoid complexity of negotiating contracts frequently

Measuring the rate of inflation using a market basket that excludes food and energy prices is preferred by some analysts because this measure, called core inflation,:

gives a better measure of ongoing, sustained price changes.

The long run in macroeconomic analysis is a period

in which full wage and price flexibility and market adjustment have been achieved.

Buying a stock on margin will

increase gains if the stock rises

When the Fed purchases government bonds it _____ reserves and ____ the money supply and ______ the fed finds rate.

increase, increase, decrease

The Fed does all of the following

influence the supply of money, influence the value of money, regulate the banking system

A liquidity trap is said to exist when a change in monetary policy has no effect on

interest rates

Stagflation

is when unemployment and inflation are both high

The CPI is a useful index for all of the following reasons

it is used to determine whether people's incomes are keeping up with the costs of the things they buy, it is used to measure changes in the cost of living, it is used to compute the U.S. inflation rate

The term "crowding out" refers to the phenomenon that occurs when increased government spending

leads to higher interest rates which reduces private investment

Which of the following result from a change in the money supply brought about by an open market purchase?

lower interest rate, lower exchange rate, increased demand for investment and net exports

Mary takes out a fixed interest rate loan and then inflation rises more than expected. The real interest rate she pays is

lower then she'd expected, and the real value of the loan falls.

A decrease in aggregate demand, all other things unchanged, will generate _______ in potential output and _______ in the price level.

no change; a decrease

The implicit price deflator is given by the formula

nominal GDP / real GDP

During an economic slump, policies that lower interest rates may not actually boost investment because

of pessimistic expectations by businesses about the future of the economy.

The LRAS is vertical at

potential output

The Fed's dual mandate is

price stability and maximum employment

In the LR, monetary policy effects? Fiscal policy effects?

prices; no effect

When the Fed buys bonds in the open market, in the product market (the aggregate demand-aggregate supply model),

real gdp and price will rise

Loanable Funds Theory

real intersts rates in LR are from Supply and Demand for money

The LRAS curve

relates the level of output produced by firms to the price level in the long run.

The major tools of monetary policy available to the Federal Reserve System are

reserve requirements, open-market operations, and the discount rate.

In the long-run, according to loanable funds theory, the real interest rate is determined by

savings and investment

Contractionary monetary policy by the Fed could include

selling government securities in an open market

According to Say's law,

supply creates its own demand

A COLA automatically rises the wage rate when

the CPI increases

The vertical Phillips curve occurs in the long run because

the aggregate supply curve is vertical which means that changes in aggregate demand will not change unemployment.

The shortest of the 3 lags for monetary policy is

the implementation lag

Potential output is

the level of real GDP that exists when the quantity of labor supplied is equal to the quantity of labor demanded.

In the LR, inflation is cause by

the money supply

In the LR, price level is determined by

the money supply

The CPI is determined by computing:

the price of a fixed basket of goods and services, relative to the price of the same basket in a base year.

The Taylor rule is a formula relating the fed funds rate the fes should target to inflation and output gaps

true

The consumer price index is used to

turn dollar figures into meaningful measures of purchasing power.

In the LR, the phillips curve is

vertical

What is the rule of 72?

years to double = 72/growth rate

What is the difference in a nominal and real value?

A nominal value is measured in current market prices while a real value is measured in base year prices.

In the SR, output is determined by

Aggregate demand

Which of the following statements is true? I)The CPI is computed using a fixed basket of goods. II)The implicit price deflator is computed a fixed basket of goods. III)The CPI and the implicit price deflator can be used to calculate inflation.

I and III only

All other things unchanged, the velocity of money will _______ if the quantity of money demanded _______.

Increases, decreases

What do economists mean by the term "sticky wage"?

It refers to a wage that is slow to adjust to its equilibrium level, creating sustained periods of shortage or surplus in the labor market.

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by:

M*V=P*Y

If velocity is constant, which of the following results flow from the quantity equation?

Nominal GDP could change only if there were a change in the money supply.

Fishers Equation

Real Interest=Nominal Interest - Inflation

If nominal income is up 5% and inflation is up 10%, what happens to real income?

Real income falls

At the end of 2008 thru 2016, the federal funds rate in the United States was close to zero. Which of the following is a major concern associated with such a low rate?

That traditional monetary policy will have no impact on the economy.

What is monetary policy?

The actions a central bank takes to influence the availability and cost of money and credit and expectations.

The Federal Reserve System was established in 1913 in response to the

The bank panic of 1907

Which of the following statements best describes the substitution bias in the construction of the CPI?

The failure to recognize that over time consumers alter the goods they buy, switching from relatively high priced goods toward lower-priced alternatives.

Gresham's Law is the tendency for low-quality money to drive high-quality money out of circulation.

True

If the velocity of money is constant, then nominal GDP can change only if there is a change in the money supply.

True

Quantitative easing refers to expansionary monetary policy when the economy is in a liquidity trap

True

The long run in macroeconomics is a period in which wages and prices are flexible and there is full market adjustment.

True

The potential level of real GDP is the level of output a society can achieve when labor is employed at its natural level.

True

A period of time against which costs of the market basket in other periods will be compared in computing a price index is called

a base period

Sustained inflation in the LR is due to

a continuous increase in the money growth rate.

If the Fed increases the discount rate, it is pursuing

a contractionary policy because it will be more costly for banks to borrow funds and this puts upward pressure on interest rates in the economy.

Deflation is defined as

a fall in average price level

In the short-run, a fall in demand results in _____ while in the long-run, a fall in demand results in _____

a fall in output and prices; a fall in prices

The Phillips curve implies

a negative relationship between inflation and unemployment.

A number whose movement reflects movement in the average level of prices is called

a price index

What constitutes inflation?

a sustained increase in the average level of prices

The _______ rate is the interest rate at which the Fed lends ______ to commercial banks.

Discount rate; deposites

What is conventional monetary policy?

Fed selects target fed funds rate, open market operations to change MS, changes supply of bank reserves

The rate of interest banks charge one another for overnight reserve loans is

Federal funds rate

The market or effective federal funds rate is determined

by the supply and demand for bank reserves

In general, an increase in the Fed's assets will, other things equal, increase

bank reserves

The sticky price explanation of the short-run aggregate supply curve says that when the average price level rises,

because of adjustment costs associated with changing prices, some firms will not raise their prices immediately which may temporarily boost their sales.

When the Federal Reserve conducts open market transactions it

buys or sells previously issued government bonds.

In the long run, monetary growth

cannot affect the factors that determine the economy's unemployment rate.

If inflation is a threat, then the fed will be expected to engage in

contractionary monetary policy

Which of the following was NOT one of the Fed's original functions

control interest rates