Macroeconomics Final Exam Ch. 13
What happens in times of deep recession under the Keynesian Theory?
an increase in the money supply does not decrease interest rates causing monetary policy to be ineffective
Policy Dilemma of a Negative Supply Shock
- Expansionary monetary policy (Ms increase) a. decrease interest rates b. AD increases * y increases but P increases further - Contractionary AD policies (ms decrease) a. increase interest rates b. AD decreases *p decreases but y decreases even further
Negative Supply Shocks
- decrease in resources - increase in resource costs production cost increases AS curve shifts to the left, resulting in stagflation
Expansionary Monetary Policy
- used to boost AD - feds open market *purchases* of bonds - increase the money supply -decrease interest rates - increase c and I shift AD to the right
Contractionary Monetary Policy
- used when inflationary pressures build up to slow down AD -fed open market *sales* of bonds - decrease money supply - increase interest rates - decrease c and I shift AD to the left
What are the key elements of major financial crisis?
- widespread fall in asset prices (capital loss) - significant currency drain (short of reserves) - run on the bank (massive withdrawals of deposits)
The 2008 financial crisis is characterized by
1. widespread fall in asset 2. paralyzed credit markets 3. liquidity crisis of banks
Classical Theory: The long-run effect of money Quantity Theory of Money
MV = PQ money supply* velocity of money (avg # of times per year that a dollar is spent on final G&S) = price level* real GDP (income) changes in M will directly change P proportionately
How is QE different from the orthodox method of increasing the money supply?
Quantitative easing increases the money supply by purchasing assets with newly created bank reserves in order to provide banks with more liquidity.
Negative Supply Shock: Contractionary Monetary policy
SRAS moves to the left AD moves to the left
Negative Supply Shock: Expansionary monetary
SRAS moves to the left AD moves to the right
If the unemployment rate is 10% and the inflation rate is 2%, the Federal Reserve will most likely:
buy bonds
In times of economic downturn, the Federal Reserve will engage in _______ monetary policy by ______ bonds.
expansionary; buying
Which action by the Federal Reserve is NOT considered to be one of its normal monetary policy tools? a. buying treasury securities b. lowering the federal funds rate c. making loans to banks at the discount rate d. buying mortgage-backed securities
d. buying mortgage backed securities
An expansionary monetary policy would result in a(n) ______ in the interest rate, which shifts the aggregate demand curve ______ .
decrease; rightward
Monetary Policy Goals
economic growth with stable prices
Classical Model Graphically
economy is at full employment an increase in AD only results in higher prices at the same output
If the economy is in a recession, the Federal Reserve would most likely pursue______, which causes interest rates.
expansionary monetary policy; fall
In counteracting a negative supply shock, the Federal Reserve could achieve _____ by using ______ monetary policy.
full employment but not price stability; expansionary
Monetarist Model Graphically
increase in money supply results in higher output in the short run long run prices adjust, SRAS shifts left and the economy returns to long-run output at a higher price level
Monetarist Theory: The short-run effect of money
increase in money supply will - increase AD - price level and output increase - leads only to inflation in the long run fiscal policy is ineffective because of full crowding out
When current output is less than potential output, which monetary policy is the Federal Reserve likely to enact? and what would be the result?
increasing reserves to decrease interest rates resulting: increases in investment, aggregate demand, and long-run growth
The overheated housing market boom of 2004-2006 caused ______ pressures, leading the Federal Reserve to ________ interest rates.
inflationary; raise
What is Quantitative Easing
large scale purchases of financial assets including: a. government bonds b. private corporate bonds c. any other financial asset the central bank chooses
Quantitative easing is BEST described as monetary policy that:
makes certain that banks have enough liquidity to avoid collapse
Negative Demand Shocks
negative demand shocks - decrease in C, I, and exports - increase in imports AD curve shifts down Shift up with expansionary monetary policy causing a rise in employment and output
Monetarists believe 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
What were the policy actions taken by the Fed to deal with the recent financial crisis?
provided banks with: a. more reserves -through massive open market operations b. more security deposits- by expanding deposit insurance c. safe liquid assets in place of troubled assets- with the feds purchases of troubled assets from banks
Tight monetary policy refers to the Federal Reserve:
raising interest rates, usually to fight inflation
To slow down a high inflation rate, the Federal Reserve should use a(n)________ monetary policy by using open market _______.
restrictive; sales
Which action is the Federal Reserve MOST likely to take to curb inflation?
sell securities in the open market
Keynesian Theory
upward sloping AS curve - increase money supply - decrease in interest rates - AD increases output expands with upward sloping AS curve