midterm 2 macro

what is the equation for the market interest rate?

R=Rff+-fbar

A constraint to complicated macroeconomic models has been: that agents are not rational. that firms do not maximize profits. an insufficient understanding of statistics. Correct! a lack of computing power. that economists have run out of ideas.

a lack of computing power.

With adaptive expectations, the Phillips curve can be written as: . . . Correct! . .

changepit=VbarYt

The B in the lifetime utility function represents: Correct Answer consumer patience. any number greater than one. the level of uncertainty. consumption. life expectancy.

consumer patience.

Consider two time periods: t and k. Which of the following would represent "today's" budget constraint? Correct!

ct=yt-(fk-ft)

Refer to the following figure when answering the following questions.Figure 12.12: Money MarketStarting at any equilibrium in Figure 12.12, if the Fed tightens money, the money market would move from point: Not enough information is given. A to D. B to D. C to A. Correct! B to C.

B to C

Refer to the following figure when answering the following questions.Figure 12.12: Money MarketStarting at any equilibrium in Figure 12.12, if individuals want to hold more wealth in savings, the money market would move from point: A to C. Correct! B to D. Not enough information is given. B to A. B to C.

B to D.

Which of the following represents the AD curve with a financial friction?

yt=abar-bfbar-bmbar(pit-pibar)

What did the Fed chairman tell a congressional panel in late September 2008? "A recession is when your neighbor loses his job; a depression is when you lose yours." "Inflation is always and everywhere a monetary phenomenon." "In the long run we are all dead." "We do not believe that more fiscal stimulus will improve economic performance." Correct! "If we don't do this [the Troubled Asset Relief Program], we may not have an economy on Monday."

"If we don't do this [the Troubled Asset Relief Program], we may not have an economy on Monday."

The March 20, 2013, Federal Open Market Committee statement asserts: "To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time . . . at least as long as the unemployment rate remains above 6-1/2 percent . . . and longer-term inflation expectations continue to be well anchored." (http://www.federalreserve.gov/newsevents/press/monetary/20130320a.htm) Your parents have taken interest in your fascinating Macroeconomics course and ask you to interpret this quote. Which of the following do you tell them? "The Fed is trying to appease labor unions." Correct Answer "The Fed is not worried about inflation but is concerned about the real economy." "The Fed believes that labor markets are recovering quickly." "The economy has recovered, and it is business as usual." "The Fed is worried about deflation."

"The Fed is not worried about inflation but is concerned about the real economy."

If we use a logarithmic utility function, the marginal utility of consumption is: equal to Correct Answer (1/c). equal to one. equal to c.

(1/c).

If the simple Taylor rule models the "ideal" federal funds rate, the ________ displayed a monetary policy that was too loose. 1980s 1990s Correct! 1970s 2000s 1960s

1970

Suppose x bar=75000, b= 1and R=.005. Assuming logarithmic utility, what is consumption in the future? Correct! $39,375.00 $75,000.00 $35,714.29 Not enough information is given. $37,500.00

39,375.00

If the current rate of inflation is 4 percent, using the values r bar=2% pi=2%, mbar= 1/2% suggested by Professor Taylor, the monetary policy rule predicts a nominal interest rate of ________ percent. 4.5 Correct! 7 4 3

7

When an economy is in a deflationary spiral, and nominal interest rates are close to zero, it may be necessary: for the Fed to buy financial securities. to use fiscal stimulus. for the Fed to print money. None of these answers is correct. Correct! All of these answers are correct.

All of these answers are correct.

________ encourage banks to ________, which ________. Lower returns on assets; hold more cash; increases the "lemon" problem Increased capital requirements; take more risk; leads to future bank bailouts Increased leverage ratios; take less risk; strengthens the banking industry Loans; increase lending; lowers market liquidity Correct Answer Bailouts; take more risk; worsens the moral hazard problem

Bailouts; take more risk; worsens the moral hazard problem

________ reduced loans despite the Fed's attempts to get liquidity flowing in financial markets after 2008. Higher federal funds rates Record real estate foreclosures Lessening regulatory control over banks You Answered Low real interest rates Correct Answer Commercial banks' reluctance to take on more risk

Commercial banks' reluctance to take on more risk

The quote "When banking stops, credit stops, and when credit stops, trade stops, and when trade stops—well, the city of Chicago had only eight days of chlorine on hand for its water supply. . . . The entire modern world is premised on the ability to buy now and pay later" is credited to: Correct! Michael Lewis. Frank Partnoy. Henry Paulson. Fed chairman Ben Bernanke. the Wall Street Journal.

Michael lewis

The reputations of ________, ________, and ________ have convinced observers that the Fed is committed to low and stable inflation. Correct! Paul Volcker; Alan Greenspan; Janet Yellen George H. W. Bush; Bill Clinton; George W. Bush David Ricardo; John Stuart Mill; Alfred Marshall John Taylor; Milton Friedman; Karl Marx Ronald Reagan; Alan Greenspan; Janet Yellen

Paul Volcker; Alan Greenspan; Janet Yellen

The term structure of interest rates shows the relationship between: U.S. Treasury rates and municipal bond yields. corporate bonds and the federal funds rate. mortgage rates and LIBOR. Correct! U.S. Treasury bills with different maturities. high and low quality corporate bonds.

U.S. Treasury bills with different maturities.

Prior to the recent financial crisis, the bulk of the Fed's assets on its balance sheet were ________ and its liabilities were ________. Correct Answer U.S. Treasury bills; currency reserves; vault cash loans; Treasury accounts currency; reserves stocks; foreign currency

U.S. Treasury bills; currency

Deflation usually arises due to ________. This in turn ________ interest rate, which ________. an exchange rate depreciation; lowers the real; makes imports more expensive loose fiscal policy; reduces the market; causes hyperinflation oil price declines; increases the mortgage; slows housing price growth tight monetary policy; pushes up the nominal; always leads to a recession Correct! a recession; raises the real; deepens the recession

a recession; raises the real; deepens the recession

Assuming the simple Taylor rule for dictating the federal funds rate, when the actual federal funds rate deviates from the suggested rate, it can be explained by: poorly informed monetary policy. Correct! a richer version of the Taylor rule. discretionary fiscal policy. bad monetary policy. poorly informed fiscal policy.

a richer version of the Taylor rule.

The following figure shows the BAA corporate and 10-year Treasury bond yields. Refer to this figure when answering the following questions.Figure 14.1: BAA and 10-Year Bonds, 2006−2010(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)In Figure 14.1 above, the 10-year bond yield is considered ________, while the BAA bond yield represents ________. Correct Answer a risk-free interest rate; a relatively risky interest rate the federal funds rate; the financial friction the saving rate; the lending rate inflation; the M1 money growth rate the financial friction; the prime lending rate

a risk-free interest rate; a relatively risky interest rate

A change in which of the following parameters shifts the AD curve ? yt=abar-bmbar(pit-pibar) None of these answers is correct. Correct Answer You Answered

abar

If ism bar relatively high, monetary policy is relatively ________ and the AD curve is ________. permissive; relatively steep Correct! aggressive; relatively flat aggressive; relatively steep permissive; vertical permissive; relatively flat

aggressive; relatively flat

Under rational expectations, people use ________ to make their best forecasts of the coming rate of inflation. all past rates of inflation Correct! all the information at their disposal only the Fed's inflation target the unemployment rate announcements by the Fed

all the information at their disposal

Euler's Formula

c future/ctoday=b(1+R

An implication of sticky inflation is that, through monetary policy changes, the Federal Reserve (the Fed): has no impact on the unemployment rate. Correct! can alter the real interest rate in the short run. has no impact on inflation. has no impact on the real interest rate. can alter the real interest rate in the long run.

can alter the real interest rate in the short run.

The problem the household must solve is: satisfying the intertemporal budget constraint by finding a good source of income. making sure the household is saving at least 10 percent of its income. Correct Answer choosing lifetime consumption that satisfies the intertemporal budget constraint. choosing period consumption to satisfy the concurrent budget constraint. choosing consumption to ensure some income is left over for future generations.

choosing lifetime consumption that satisfies the intertemporal budget constraint

The consumer chooses his or her ________ to maximize his or her ________. consumption; income wealth; profits income; consumption interest rate; wealth Correct Answer consumption; utility

consumption; utility

Consider two time periods: t and k. Which of the following would represent the "future's" budget constraint? Correct Answer

ct=yt+(1+R)ft

The intertemporal budget constraint is written as:

ctoday+(cfuture/1+R)=ftoday+ytoday+(future/1+R)

Refer to the following figure when answering the following questions.Figure 12.2: IS-MP CurveConsider Figure 12.2. If housing prices drop sharply, there is a loss in consumer and investor confidence and the economy moves from point ________. To prevent a ________, the Fed ________, and the economy moves from point ________. c to b; bubble; raises interest rates; b to c Correct! d to c; recession; lowers interest rates; c to b a to d; recession; lowers interest rates; d to b Not enough information is given. a to d; recession; lowers interest rates; d to c Question 8

d to c; recession; lowers interest rates; c to b

Refer to the following figure when answering the following questions.Figure 12.2: IS-MP CurveConsider Figure 12.2. If the Fed lowers interest rates and there are no aggregate demand shocks, the economy moves from point ________ to ________. e; d Not enough information is given. e; b d; c Correct! d; a

d; a

efer to the following figure when answering the following questions.Figure 14.2: IS-MP CurveConsider Figure 14.2. Starting from the long-run equilibrium, the burst of the housing bubble and the appropriate Fed response, WITHOUT a financial friction, can be shown as a movement from point ________ to point ________, and the economy is in ________. b; a; an expansion Correct Answer d; b; its long-run equilibrium a; d; a recession c; e; its long-run equilibrium a; d; an expansion

d; b; its long-run equilibrium

The utility function is constructed in such a way that consumption exhibits: a single period level of utility. diminishing utility. Correct! diminishing marginal utility. total satisfaction. total lifetime income.

diminishing marginal utility.

During the ________, the actual federal funds rate was substantially lower than the rate suggested by the simple Taylor rule. None of these answers is correct. early 1960s Correct! early 1990s early to mid-1980s late 1990s

early 1990s

Which of the following financial reforms were suggested by the Squam Lake Group? increase leverage ratios allow bonuses to be paid out for only short-term investments Correct! enhance capital requirements allow banks to choose the amount of risk allow a bank to choose its own regulator

enhance capital requirements

Once a ________ is chosen, the main tool the Federal Reserve uses to change the money supply is ________. federal funds rate; changing the discount rate discount rate; borrowing money from the federal government Correct! federal funds rate; open-market operations number of dollars in circulation; changing the reserve rate tax rate; changing the exchange rate

federal funds rate; open-market operations

In the intertemporal budget constraint, is: equal to future borrowing. equal to zero. Correct Answer today's saving for the future. the rate of return on financial wealth. future savings.

ffuture-ftoday

In standard circumstances a firm ________ when its ________. In financial markets this approach did not work following the ________. outsources its labor; net revenues are negative; purchase of Merrill Lynch by the Bank of America increases its risky holdings; revenues fall; volatility of exchange rates in Japan sells its assets at fire sale prices; profits are negative; AIG debacle Correct Answer files for bankruptcy; liabilities exceed its assets; collapse of Lehman Brothers borrows liquidity from the Fed; leverage ratio rises above 75; passage of the TARP legislation

files for bankruptcy; liabilities exceed its assets; collapse of Lehman Brothers

In the intertemporal budget constraint, wealth is equal to: financial wealth. lifetime income. Correct Answer financial plus "human" wealth. savings held in stocks and bonds. the overall stock of assets held by future generations.

financial plus "human" wealth.

Refer to the following figure when answering the following questions.Figure 13.1: AD CurveConsider Figure 13.1. Holding inflation constant, if the interest rate increases, the economy would move from point e to point: a. d. Correct! g. c. b.

g

The European debt crisis hit all of the following countries very hardEXCEPT: Italy. Ireland. Correct! Germany. Spain. Greece.

germany

1 / 1 pts The left-hand side of the Euler equation, cfuture/ctoday, represents the: total lifetime consumption, in dollars. growth rate of income. lifetime utility function. Correct! growth rate of consumption.

growth rate of consumption

Which of the following is the mission of the Federal Reserve Bank? i. Preserve price stability ii. Foster stable fiscal policy iii. Ensure taxes are fair Correct Answer i only You Answered i and ii iii only i and iii ii only

i only

Which of the following is the mission of the Federal Reserve Bank? i. Preserve price stability ii. Foster economic growth and employment iii. Promote a stable financial system ii only i only iii only Correct Answer i, ii, and iii You Answered i and ii

i, ii, and iii

Which of the following contributed to high levels of inflation in the 1970s? i. A Soviet invasion of Afghanistan ii. Loose monetary policy iii. A productivity slowdown i only ii only iii only Correct! ii and iii i and iii

ii and iii

An increase in the interest rate by the Federal Reserve will affect only real interest rates because: prices are flexible in the short and long runs. we are in the long run. of the quantity theory of money. Correct! inflation is sticky in the short run. contracts apply only in the very short run.

inflation is sticky in the short run.

According to the Phillips curve, if the: inflation rate is rising, the economy is in recession. None of these answers is correct. inflation rate is falling, the economy is booming. Correct Answer inflation rate is rising, the economy is booming. You Answered unemployment rate is falling, the economy is booming.

inflation rate is rising, the economy is booming.

According to the Phillips curve, if current output is above potential output: inflation is constant. Correct! inflation rises. unemployment falls. inflation falls. tax rates rise.

inflation rises.

In most advanced economies, central banks target ________ to conduct monetary policy. government debt Correct! interest rates the money supply tax rates exchange rates

interest rates

When inflation is negative it: has no effect on the unemployment rate. increases the positive output gap. Correct! is called deflation raises the demand for investment. increases the growth of money.

is called deflation

The financial friction: is lower in uncertain economic situations. Correct Answer is equal to zero when the economy is in its long-run equilibrium. is negative in Japan. lowers the borrowing rate below the nominal federal funds rate. is equal to the rate of inflation.

is equal to zero when the economy is in its long-run equilibrium.

he Taylor rule predicted the federal funds rate (in the text) was derived from which of the following equations? Correct!

it=1%+1.5pit+.5yt

The Fisher equation is given by: . . . . Correct! .

it=Rt+pit

Which of the following equations, discussed in the text, can be used to predict the federal funds rate? Correct!

it=rbar+pit+mbar(pit-pibar)

One of the remarkable things about the 2001 recession was the: deflation. Correct! jobless recovery. impact of Hurricane Katrina on it. rapid return to potential output. fact that unemployment fell.

jobless recovery.

In a weakening economy, you might expect producers to: Correct Answer lower prices to increase quantity demand for their output. raise wages to hire more productive workers. You Answered increase prices to increase quantity demand for their output. lower prices to reduce quantity demand for their output. lower wages to increase quantity demand for their output.

lower prices to increase quantity demand for their output.

In the IS/MP framework, when the Fed ________ the federal funds rate in the aftermath of the decline in housing prices, the ________ caused a(n) ________ in the real interest rate. held constant; Okun effect; decline raised; higher inflation rate; fall manipulated; Fisher effect; increase raised; unemployment rate; fall Correct! lowered; financial friction; increase

lowered; financial friction; increase

When a central bank targets interest rates, it adopts a policy to adjust ________ to accommodate ________. Correct! money supply; money demand shocks money supply; tax changes money demand; money supply shocks interest rates; money supply money demand; government debt

money supply; money demand shocks

In the aftermath of the recent financial crisis, the Fed's assets on its balance sheet grew to include which of the following? bank reserves term auction credit Correct Answer mortgage-backed securities You Answered liabilities Treasury accounts

mortgage backed securities

In the aftermath of the financial crisis that began in 2008, the Fed's assets grew primarily as: reserves. Correct! mortgage-backed securities and "other." currency and loans. holdings of foreign currency. U.S. Treasury bills.

mortgage-backed securities and "other."

In the AS/AD framework, the financial friction appears as a: Correct! negative demand shock. negative supply shock. The financial friction is only present in the IS/MP model. positive supply shock. change in the long-run real interest rate.

negative demand shock.

The model used to explain consumption is called the ________ consumption model. Correct! neoclassical Stone-Geary classical Keynesian Solow

neoclassical

In the simple ________ model of consumption, we consider a(n) ________ period lifetime. Keynesian; one Marxian; one Correct Answer neoclassical; two Stone-Geary; infinite constant rate of risk aversion; T

neoclassical; two

If the central bank reduces the money supply, the: nominal interest rate falls and individuals hold no money. unemployment rate rises and individuals hold less money. inflation rate rises and individuals hold more money. Correct! nominal interest rate rises and individuals hold less money. nominal interest rate rises and individuals hold more money.

nominal interest rate rises and individuals hold less money.

If mbar is close to zero, monetary policy is relatively ________ and the AD curve is ________. Correct! permissive; relatively steep permissive; vertical aggressive; relatively flat aggressive; relatively steep permissive; relatively flat

permissive; relatively steep

A change in which of the following parameters would cause a movement along the AD curve ?yt=abar-bmbar(pit-pibar) None of these answers is correct. Correct!

pit

Refer to the following figure when answering the following questions.Figure 12.2: IS-MP CurveConsider Figure 12.2. If the Fed raises interest rates and there are no aggregate demand shocks, the economy moves from: point b to a Correct! point b to c point c to d Not enough information is given. point b to d

point b to c

P/E ratio stands for ________ ratio. Correct! price-earnings price-expenditure physical education stock index-GDP home price-easing

price-earnings

In the Phillips curve, , if mbar is large, then: price-setting behavior is completely insensitive to short-run fluctuations. Not enough information is given. inflation is not very sensitive to short-run fluctuations. price-setting behavior is very insensitive to short-run fluctuations. Correct! price-setting behavior is very sensitive to short-run fluctuations.

price-setting behavior is very sensitive to short-run fluctuations.

The Troubled Asset Relief Program was originally designed to ________, but funds were ultimately used ________. bolster bank stock prices; to pay bank executive bonuses bail out banks; for purchases of "toxic assets" nationalize banks; for unemployment insurance and financing the wars in Iraq and Afghanistan prevent takeovers of U.S. banks by foreign nationals; to insure assets held by member banks Correct Answer purchase and insure assets held by financial institutions; to purchase equity from financial institutions and bail out U.S. automakers

purchase and insure assets held by financial institutions; to purchase equity from financial institutions and bail out U.S. automakers

According to the Fisher equation, the nominal interest rate is equal to the: Correct! real interest rate plus the rate of inflation. rate of inflation. real interest rate plus short-run economic fluctuations. rate of unemployment. real interest rate minus the rate of inflation.

real interest rate plus the rate of inflation.

As a college student, you are likely to be impatient; therefore, your consumption growth rate would be: solely dependent on the amount of future income. relatively fast. Not enough information is given. inversely related to the interest rate. Correct! relatively slow.

relatively slow.

The intertemporal budget constraint basically states that: there is no future consumption because there is no future income. the present value of consumption is paid for by today's income only. the present value of consumption must equal lifetime income only. total consumption equals total income. Correct Answer the present value of consumption must equal lifetime wealth.

resent value of consumption must equal lifetime wealth.

If you see low interest rates, you(r) ________ and consumption growth ________. expect high rates of inflation; speeds up Correct! save less; slows down permanent income is constant; is zero save more; increases discount the future more; is constant

save less; slows down

When a financial friction is added to the short-run model it: Correct Answer shifts the MP curve up. is represented by a movement along the MP curve. shifts the IS curve down. shifts the AS curve down. is represented by a movement along the IS curve.

shifts the MP curve up.

In a paper by Minneapolis Fed bank president Narayana Kocherlakota, he argues that research in macroeconomics is hampered by: Correct Answer the state of technology. a fundamental misunderstanding of the macroeconomy. too many disagreements by macroeconomists. models that are too complicated. the Lucas critique.

state of technology

An inverted yield curve is usually the result of: greater uncertainty in the future. a present-value calculation. Correct! the Fed fighting inflation. a devaluing currency. the time value of money.

the Fed fighting inflation.

An inverted yield curve is usually the result of: the time value of money. a devaluing currency. greater uncertainty in the future. a present-value calculation. Correct! the Fed fighting inflation.

the Fed fighting inflation.

The aggregate supply (AS) curve is derived from: Okun's law. the Fisher equation. Correct! the Phillips curve. the interaction of the IS and MP curves. the monetary policy rule.

the Phillips curve.

The B in the lifetime utility function represents: any number greater than one. expected future wealth. the risk parameter. Correct! the amount of future discount. life expectancy.

the amount of future discount.

In the simple monetary policy rule , represents:Rt-rbar=mbar(pi-pibar), pi-pibar represents the target rate of inflation. the marginal product of capital. how sensitive monetary policy is to changes in in, flation. the risk premium. Correct! the deviation of the inflation rate from the target rate.

the deviation of the inflation rate from the target rate.

According to the Fisher equation, the real interest rate is given by: You Answered the nominal interest rate plus the rate of inflation. zero. the nominal interest rate minus the rate of unemployment. the rate of economic growth. Correct Answer the nominal interest rate minus the rate of inflation.

the nominal interest rate minus the rate of inflation.

Human wealth is given by: Correct! the present value of labor income. Health. human capital accumulation. government transfers. Education.

the present value of labor income.

To identify an asset bubble, economists and analysts frequently rely on: corporate annual reports. Correct! the price-earnings ratio. the current stock market price growth relative to average stock price growth. a stock's "beta." the present discounted value of expected profits.

the price-earnings ratio.

Policymakers will find it easier to achieve their goals by sticking to policy rules rather than discretion if they face the problem of: adaptive expectations. very short policy lags. a weak central bank. Correct! time inconsistency. discretionary fiscal policy.

time inconsistency.

Your lifetime utility is a function of: Correct Answer today's consumption and the present value of future consumption. the present value of future consumption only. the amount of wealth in the utility function. your lifetime income. today's consumption only.

today's consumption and the present value of future consumption.

When a financial institution is deemed too systematically important to go under, it is ________. This leads to ________. a monopoly; above-marginal cost pricing an "umbrella" bank; less competition an investment bank; nationalization Correct! too big to fail; moral hazard a bank-holding company; adverse selection

too big to fail; moral hazard

Xbar In the intertemporal budget constraint, is: a household stock of bank savings. Correct! total lifetime wealth. today's wages. lifetime income. future wealth.

total lifetime wealth.

Household consumption accounts for about ________ of U.S. GDP. Correct Answer two-thirds one-half five-sixths one-third one-fourth

two-thirds

If you have maximized your lifetime utility, you get which of the following?

u(ctoday)=b(1+R)u(Cfuture)

Which of the following represents the consumer's lifetime utility?

u(ctoday+bu(cfuture)

he parameter b in the consumer's lifetime utility function represents the ________ and is ________ if utility is worth more today than in the future. expected present value of lifetime wealth; unknown today value of future consumption; equal to one or equal to zero Correct Answer weight he or she puts on the future relative to today; less than one annual income growth; equal to the average GDP growth rate rate of return to savings; equal to long-term bond yields

weight he or she puts on the future relative to today; less than one

If the central bank is targeting the money supply, the money supply is ________ and ________ with respect to the nominal interest rate. whatever level is dictated by the central bank; slopes downward whatever level is dictated by the president; is horizontal Correct! whatever level is dictated by the central bank; is vertical equal to money velocity; is vertical whatever level is dictated by the central bank; is horizontal

whatever level is dictated by the central bank; is vertical

If b>1 in your lifetime utility function, then: your utility function displays increasing marginal returns. you prefer utilities received today relative to the future. Correct! you prefer utilities received in the future relative to today. Not enough information is given. you are risk averse.

you prefer utilities received in the future relative to today.

Between 2009 and 2015, the federal funds rate was roughly equal to: 2 percent. the unemployment rate. the rate of inflation. Correct Answer zero. You Answered 0.5 percent.

zero.