Chapter 10, 14, 18, 20 definition questions
When the Fed lowers the nominal interest rate to zero, what is the real interest rate?
-pit
How does "securitizing" assets reduce overall risk?
By selling assets to a large number of investors and mixing high risk/yield assets with low risk/yield assets into a single asset
Using the notation is the text, the long-run level of the exchange rate is:
Ebar=PbarW/Pbar
Which of the following is NOT correct about the relationships between the global savings glut, subprime loans, interest rates, and the burst housing bubble?
The increase in savings pushed market interest rates up.
___ simply states that, in the long run, individual goods must sell for the same price in all countries.
The law of one price
Prior to the recent financial crisis, the bulk of the Fed's assets on its balance sheet were ___ and its liabilities were ___.
U.S. Treasury bills; currency
A supposition of mortgage securization is that:
a large fraction of loans will not go bad at the same time.
Deflation usually arises due to ___. This in turn ___ interest rate, which ___.
a recession; raises the real; deepens the recession
U.S. government debt that is not held by the public often is not counted in economic analyses because it is:
an asset transfer from one branch of government to another.
If the real exchange rate is greater than 1, foreign goods:
are relatively cheap and domestic goods are relatively expensive.
The government's intertemporal budget constraint assumes that the budget is:
balanced in the last period.
When all depositors converge on a bank to remove their deposits there is a(n):
bank run.
When we include the interest gap in the IS model, the IS curve:
becomes shallower, reflecting how the domestic interest rate affects investment and net exports.
The "flight to safety" in the fall of 2007 led investors to ___, which led to ___.
buy T-bills; a rise in the spread between LIBOR rates and T-bill yields
According to the text, the main culprit for the rapid increase in medical expenditures is:
changing preferences.
Which of the following is NOT a securitized asset?
commercial bonds
The burst of the housing bubble can be represented in the IS/MP model as a(n):
decline in a.
After the Fed began to raise the federal funds rate in 2004:
default on subprime mortgages increased.
Which of the following is/are NOT (an) asset(s) on a bank's balance sheet?
deposits
The financial friction is the:
difference between the federal funds rate and interest rates in financial markets.
The goal of securization is to:
diversify risk by buying different classes of assets.
The difference between the primary and total defecits is that the primary deficit:
excludes spending on interest.
When an economy is in a deflationary spiral, and nominal interest rates are close to zero, it may be necessary:
for the Fed to print money, for the Fed to buy financial securities, and to use fiscal stimulus.
In the aftermath of the financial crisis that began in 2008, the Fed's assets and liabilities on its balance sheet:
grew to over $2 trillion.
The housing bubble was NOT fueled by which of the following factors:
high unemployment
The U.S. dollar would appreciate if:
iUS goes up
An explanation for the depreciation of the dollar vis-a-vis is the euro is that:
inflation in the United States is higher than in the euro area.
When a bank's assets cannot cover its liabilities, the bank is:
insolvent.
In the long run, the nominal exchange rate:
is equal to the ratio of the price levels in the two economies.
The financial friction:
is equal to zero when the economy is in its long-run equilibrium.
The majority of mortgage-backed securities were held by:
large commercial and investment banks
Which of the following is true?
lower iUS => lower E
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.
lowered; financial friction; increase
In the IS/MP framework, when the Fed ___ the federal funds rate in the aftermath of the decline in housing prices, the financial friction gave a rise to a(n) ___ in the real interest rate, which caused a(n) ___.
lowered; increased; deeper recession
Securization is defined as:
lumping large numbers of financial instruments together and selling pieces of different types of investors.
The government uses funds to:
make transfer payments, buy goods and services, pay interest on outstanding debt.
In ___, the Fed began to raise the federal funds rate in response to ___.
mid 2004; rising inflation
If there is an appreciation of the real exchange rate:
net exports will fall.
The real exchange rate can be decomposed into two parts: the ___ and the ___.
nominal exchange rate; ratio of the domestic price level to the world price level
The real exchange rate measures the:
number of foreign goods required to purchase a single unit of a domestic good.
The nominal exchange rate between the U.S. dollar and the Croatian kuna is the:
number of kuna you can get for one dollar.
A significant cause of the 2008 financial crisis was that financial institutions were:
over-leveraged.
Let P denote the price of goods in the United States, pW denote the price of goods in the foreign country, and E denote the exchange rate, measured as the number of units of foreign currency that can be purchases with one dollar. According to the law of one price:
pW=EP
If the price of a Yoo-hoo is $2 in New York and $1 in St. Petersburg, Russia (after converting the rubles to dollars), you might expect:
people to buy Yoo-hoo in St. Petersburg and sell it in New York until the price was the same in each country.
The reason that the law of one price might fail in the short run is that:
prices are sticky and the nominal exchange rate is a financial price and adjusts rapidly to new information.
When the Fed buys assets other than short-term government bonds it is called:
quantitative easing.
What incentive did banks have to give large loans to households with relatively little income?
rapidly rising housing prices
If the law of one price holds for all goods, the:
real exchange rate equals 1.
The increased spread between three-month LIBOR and three-month bond yields led to ___. This is a classic example of ___.
reduced lending; a liquidity crisis
The Fed's balance sheets normally consists of:
reserves and short-term bonds
When we add financial friction to the AD curve it:
shifts the AD curve down.
When a financial friction is added to the short-run model it:
shifts the MP curve up.
The reason the real and nominal exchange rates may differ in the short run is:
sticky prices.
The name given to low-quality loans is:
subprime loans.
The source(s) for funds of the government is/are
tax revenues, new borrowing, printing money
With the foreign interest rate in the IS model, an increase in the foreign interest rate causes ___ because ___.
the IS curve to shift right; it leads to a depreciation of the domestic real exchange rate
The euro area is now the largest economy in the world. If the European Central Bank raises its interest rate, we expect ___ because the dollar would ___ relative to the euro.
the U.S. IS curve shift to the right, depreciate
In our open-economy SR Macro model, what are the impacts of an increase in savings in China, which reduces world interest rates?
the U.S. IS curve to shift left; appreciate
When there is deflation:
the central bank cannot push the real interest rate to zero.
You open up the Wall Street Journal and notice the federal funds rate in the United States is 0 percent, while in the United Kingdom, the current bank rate, the U.K.s version of the federal funds rate is, 0.5 percent. From this, you conclude:
the dollar will depreciate against the pound.
When it takes fewer euro to buy one dollar:
the euro has appreciated.
The effects of deflation mimic the analysis of:
the financial friction
The global savings glut can be defined as:
the increase in foreign savings moving into the United States in search of investment opportunities.
What is the Federal Funds rate?
the interest rate charged by banks for overnight loans
If goods are nontradable, like haircuts
the law of one price does not hold because there are no arbitrage possibilities.
If the law of one price holds for all goods and the quantity theory of money determines the long-run price level, we can pin down:
the long-run level of the exchange rate.
The government debt is:
the outstanding stock of bonds that have been issues in the past.
The economic meaning of the intertemporal budget constraint is that:
the present discounted value of the government's budget must balance.
What is an indicator of the extent of risk in financial systems?
the spread between the monthly U.S T-bill yield and LIBOR rate
Which of the following explains why the law of one price might not hold?
trade barriers, transportation costs, institutions, differences in preferences
In the short run, the real exchange rate moves with:
unanticipated changes in the nominal exchange rate.