Macroeconomics Exam 3 Part 2 Answers

Which of the following acts created the central bank of the United States as we know it today?

The Federal Reserve Act of 1913

Friedman pioneered the idea that consumption is based on both wealth and income.

True

Which short-run economic shock would be the MOST difficult to address through monetary policy?

Decrease in short-run aggregate supply

Open market operations involve the purchase and sale of:

Government securities

If a bank has a total of 80,000$ in deposits and has made three loans in the amounts of 10,000$, 20,000$, and 30,000$, what is the bank's reserve ratio (assuming it has no other deposits or made any other loans)?

25%

If the money multiplier is 4, what is the reserve requirement?

25%

Suppose banks hold 20% of money in reserves. What is the money multiplier?

5

Which policy would cause a reduction in both bank reserves and aggregate demand?

An increase in the reserve requirement

If the unemployment rate is 10% and the inflation rate is 2%, the Federal Reserve will most likely:

Buy bonds

Suppose short-run aggregate supply shifts to the left because of a decrease in the supply of steel. The Federal Reserve fights the resulting recession with expansionary monetary policy. This will:

Cause inflation

Which economists believe that because the economy will always self-adjust, intervention is unnecessary?

Classical economists

The idea that a change in the money supply would affect prices but not real GDP is associated with the:

Classical monetary transmission mechanism

Which of these is a liability for a bank?

Customers' checking account balances

Keynes defined the liquidity trap as a situation in which, once interest rates decrease, individuals spend their money rather than holding onto it.

False

The Federal Reserve was the only major central bank that had to go beyond using the traditional tools of monetary policy to deal with the 2007-2009 financial crisis.

False

The long-run aggregate supply curve is upward sloping because of sticky wages and prices

False

Which characteristic of the Fed was NOT designed to help maintain the Fed's independence?

Fed Board members are elected but confirmed by the president and the Senate. Board members do not have to worry about pleasing an electorate once elected and confirmed.

Friedman advocated a steady growth in the supply of money.

True

Under which condition would the Fed be most likely to engage in its role as the lender of last resort?

If a lack of confidence in the financial system causes savers to withdraw money from banks

Agricultural output is a large part of Econland's GDP. Particularly bad weather one year leads to an output that is smaller than normal, causing a shock to Econland's economy. Which of these correctly describes, from a Keynesian perspective, the impact of expansionary or contractionary monetary policy taken to address the situation?

Increase M1 to reduce unemployment but adding to inflation, or decrease M1 to reduce the inflation while adding to unemployment

The Federal Reserve will keep the inflation rate constant, regardless of evolving economic conditions, if it is using:

Inflation targeting

The housing bubble of 2004-2006 caused ____ pressures, leading the Federal Reserve to ____ interest rates.

Inflationary; raise

When the interest rate falls, American bonds become ____ attractive to foreign investors, often leading to a(n) ____ in the value of the U.S. dollar in foreign exchange markets.

Less; decrease

The dramatic collapse in price of technology stocks in 2001-2003, coupled with a short recession in 2001, caused the Federal Reserve to ____ interest rates to stimulate ___

Lower; employment

What is the most important function of the Federal Reserve?

Open market operations

Monetarists believe that in the short run, a change in the money supply can affect ___, while in the long run, a change in the money supply will affect ____.

Output and the price level; the price level only

____ on credit by households and_____ interest rates set in motion the events that led to the 2007-2009 recession.

Overspending; low

In order for the Federal Reserve to raise interest rates, it needs to:

Reduce the money supply

Which statement about the European financial crisis is false?

The European Central Bank has resolved all financial crises in its member nations

What is the difference between the Eurozone and the European Union (EU)?

The Eurozone includes all countries that adopted the Euro as their official currency, while the EU includes all countries that belong to the European Union

During the last financial crisis, the Federal Reserve was criticized for overstepping its authority and exercising powers it had not been granted. Which of these was NOT one of the causes of this criticism of the Fed?

The Fed did not explain why it was taking certain actions

Consider the T-account in the table. If the reserve requirement is 20%, then:

The potential money multiplier and the actual money multiplier are the same

All other things equal, most economists agree that in the event of a supply shock, the preferable policy is to fight the recession rather than the inflation.

True

If the Federal Reserve pursues expansionary monetary policy, the dollar is likely to fall against foreign currencies, all other things being equal.

True

Monetary targeting keeps M1 and M2 on a steady path

True

Permanent income is income that consumers expect to earn over the long run

True

The European Central Bank bailed out nearly half of its member countries to prevent the collapse of the euro.

True

When a demand shock occurs in the short run, monetary policy may focus on either output or income, since the effect is the same as focusing on price stability

True

When the Open Market Committee buys 1$ million worth of bonds, 1$ million of reserves is instantly put into the banking system

True