Chapter 14 SB Macro Economics

After 2008, why could the Fed no longer reduce different, more risky, interest rates in the economy by reducing the federal funds rate? Banks wholly objected to reducing interest rates any further. The federal funds rate was already at its zero lower bound. The other, more risky, interest rates were already at their zero lower bound. All interest rates are independent: a change in one does not affect another.

The federal funds rate was already at its zero lower bound.

The money demand curve slopes _____ because as the nominal interest rate increases, the opportunity cost of holding money _____. downward; decreases downward; increases upward; decreases upward; increases

downward; increases

The money demand curve slopes _____ because as the nominal interest rate increases, the opportunity cost of holding money _____. downward; decreases upward; increases upward; decreases downward; increases

downward; increases

The Fed takes steps to eliminate _____ gaps because they lead to inflation.

expansionary

The Fed takes steps to increase the real interest rate in order to eliminate ______ gaps. expansionary both expansionary and recessionary recessionary

expansionary

Stock prices tend to ______ on news of inflation because financial investors understand that inflation will lead the Fed to increase interest rates in order to "cool down" the economy. fall change very little rise

fall

If i denotes the nominal interest rate and p denotes the rate of inflation, then the real interest rate is given by: i × p ip i - p p - i

i - p

If real GDP increases, we would expect the demand for money to _____. increase decrease be unaffected

increase

Inflation tends to lower stock prices because financial investors know that the Fed is likely to ______ interest rates in a attempt to _____ planned aggregate expenditure. increase; lower decrease; raise decrease; lower increase; raise

increase; lower

In graph form, with real interest on the vertical axis and the inflation rate on the horizontal axis, what does the Fed's policy reaction function look like? Upward-sloping Horizontal line at the current real interest rate Downward-sloping Vertical line at the current inflation rate

Upward-sloping

At any given level of output, consumption spending __________ and planned investment spending ________ when the real interest rate decreases. increases; increases decreases; increases decreases; decreases increases; decreases

increases; increases

Historically, the Fed has used monetary policy primarily to (select all that apply): prevent stock market crashes keep inflation low reduce output gaps moderate house prices

keep inflation low reduce output gaps

To ______ the federal funds rate, the Fed conducts open-market purchases. increase lower

lower

The _____ of holding money is measured by the interest rate that could have been earned by instead holding interest-bearing assets such as stocks and bonds. marginal benefit purpose opportunity cost

opportunity cost

In order to increase the prevailing interest rate, the Fed ______. increases government spending sells government bonds decreases the money supply buys government bonds increases the money supply

sells government bonds decreases the money supply

In an open-market purchase, the Fed ______. sells reserves buys reserves buys securities sells securities

sells reserves buys securities

If real income falls, the money demand curve will _____. not change shift to the left shift to the right

shift to the left

Which of the following will shift the money demand curve to the right? A decrease in the nominal interest rate An increase in the price level An increase in the nominal interest rate An increase in real income

An increase in the price level An increase in real income

True or false. If the Fed's policy reaction function contains two variables, the real interest rate and the inflation rate, then the curve associated with this information will be downward sloping.

False

True or false: Historically a primary focus of monetary policy has been to prevent stock prices from falling.

False

Real interest rates influence the behavior of The Fed Households Firms Government

Households Firms

Which of the following are consistent with the Taylor rule? Modified versions of the Taylor Rule, where the Fed considers inflation forecasts, provide a better description of th Fed's behavior. The Taylor Rule is a legal statute the the Fed follows and the court system regulates. The Taylor Rule has provides the best description of the Fed's behavior for the last 20 years. According to the Taylor Rule, the Fed responds to output gaps AND the rate of inflation.

Modified versions of the Taylor Rule, where the Fed considers inflation forecasts, provide a better description of th Fed's behavior. According to the Taylor Rule, the Fed responds to output gaps AND the rate of inflation.

True or false: Businesses, like individuals, demand money.

True

Economists often find it convenient to summarize the Fed's behavior using expansionary fiscal policy a zero lower bound a policy reaction function reserve requirement ratios

a policy reaction function

The money that banks must hold in their vaults or on deposit with the Federal Reserve Bank is called ______. federal funds required funds required reserves federal reserves

required reserves

The decision about the forms in which to hold one's wealth is called the ______ allocation decision.

portfolio

When the economy faces a condition where it is overheating, the Fed ______ real interest rates.

raises

True or false: Excess reserves add to the money supply.

False

True or false: The demand for U.S. dollars is unaffected by political and economic conditions abroad.

False

True or false: The federal funds rate is an official government interest rate.

False

What can the Fed do to raise the federal funds rate once it has reached its zero lower bound? Raise the rate paid to banks on their required reserves. Lower the rate paid to banks on their required reserves Conduct open market purchase of long-term government securities. Reduce the required reserve amount faced by banks.

Raise the rate paid to banks on their required reserves.

True or false: Money is a type of financial asset.

True

What is the zero lower bound? the lowest rate that the stock market can offer investors aggregate spending equal to aggregate demand a federal funds rate between 0 and 0.25 percent an inflation rate between 0 and 0.25 percent

a federal funds rate between 0 and 0.25 percent

The decision about the forms in which to hold one's wealth is called the portfolio ______ decision.

allocation

Nominal interest rates _____ the quantity of money supplied to the economy. are determined by are not affected by

are determined by

The federal funds rate is the rate of interest that:

banks charge each other for very short-term loans

In the United States, _____ hold more than half of the total money stock. businesses individuals banks

businesses

In an open-market sale, the Fed ______. buys securities buys reserves sells securities sells reserves

buys reserves sells securities

Discount window lending is the lending of reserves: by commercial banks to each other by commercial banks to the Federal Reserve by the Federal Reserve to the federal government by the Federal Reserve to commercial banks

by the Federal Reserve to commercial banks

In the United States, businesses hold _____ than half the total money stock. less more

more

In order to eliminate recessionary gaps, the Fed takes steps to _____ real interest rates. decrease hold constant increase

decrease

Factors that decrease the benefit of holding money, such as the introduction of ATM machines (select all that apply): shift the money demand curve to the right increase the demand for money decrease the demand for money shift the money demand curve to the left

decrease the demand for money shift the money demand curve to the left

Since 1960, the amount of money people hold in the form of cash and checking account balances (M1) has _____. decreased increased remained relatively constant

decreased

All else equal, the demand for money _____ when the price level falls. increases decreases doesn't change

decreases

As the nominal interest rate decreases, the opportunity cost of holding money _____, leading the money demand curve to slope _____. increases; downward decreases; upward increases; upward decreases; downward

decreases; downward

The Fed's choice of the money supply _____ the nominal interest rate. has no effect on determines

determines

The interest rate that the Fed charges on loans they grant to commercial banks is called the _____. discount rate banker's rate securities rate investment rate

discount rate

The lending of reserves by the Federal Reserve to commercial banks is known as _____. reserve window lending federal funds lending discount window lending the federal funds rate

discount window lending

Bank reserves that exceed the reserve requirements set by the central bank are called _____. excess reserves the money supply reserve requirements excess rate

excess reserves

As the nominal interest rate rises, the quantity of money demanded _____. doesn't change rises falls

falls

The money demand curve will shift to the left if the real price level _____. rises falls

falls

The quantity of money demanded rises as the nominal interest rate _____. falls rises

falls

After the terrorist attacks on September 11th, 2001, the Fed decreased the federal funds rate because it: feared that a fall in consumption spending would worsen the recession was worried about an expansionary gap wanted to encourage consumers to save feared that in increase in consumption spending would worsen the recession

feared that a fall in consumption spending would worsen the recession

A bank that has insufficient reserves to meet its legal reserve requirements might borrow money from another bank at the _____. real interest rate discount rate federal funds rate

federal funds rate

More than any other financial variable, changes in the _____ signal the Fed's plans for monetary policy. federal funds rate real interest rate interest rate on long-term government bonds rate of inflation

federal funds rate

The Federal Reserve targets the _____ through open-market operations that directly affect the supply of bank reserves. federal funds rate discount rate tax rate

federal funds rate

The quantity of money supplied is: increasing in the nominal interest rate so that the money supply curve is upward sloping decreasing in the nominal interest rate so that the money supply curve is downward sloping fixed and determined by the central bank

fixed and determined by the central bank

When the Fed provides information about its future monetary-policy path, it is engaging in __________. insider trading zero lower bound quantitative easing forward guidance

forward guidance

The nominal interest rate can be thought of as the price of: holding money investment stocks output

holding money

If the Fed lowers reserve requirements, the money supply will _____. not change decrease increase

increase

If the Fed wants to decrease the money supply, it could _____ reserve requirements. increase decrease

increase

Increases in the price level _____ the demand for money. do not affect increase decrease

increase

To the extent that increased political and economic instability in other countries leads the citizens of those countries to view the U.S. dollar as a relatively safe way to hold wealth, the demand for U.S. dollars will _____. decrease increase

increase

When the nominal interest rate falls, the quantity of money demanded will _____. decrease increase not change

increase

Factors that increase the benefit to holding money will _____ the demand for money and shift the money demand curve to the _____. increase; right decrease; right increase; left decrease; left

increase; right

Because discount window lending increases banks' reserves, it _______ the money supply. decreases increases has little effect on

increases

The money demand curve will shift to the right if real income _____. increases decreases

increases

In order to reduce the prevailing interest rate, the Fed ______. increases the money supply increases government spending buys government bonds decreases the money supply sells government bonds

increases the money supply buys government bonds

Discount window lending: increases the reserves of commercial banks lowers the required reserves of commercial banks raises the interest rates paid by commercial banks

increases the reserves of commercial banks

Discount window lending: increases the reserves of commercial banks raises the interest rates paid by commercial banks lowers the required reserves of commercial banks

increases the reserves of commercial banks

For households, a higher real interest rate ________ the incentive to save and __________ people's willingness to spend on consumer goods and services. reduces; increases reduces; reduces increases; reduces increases; increases

increases; reduces

Money is demanded by: businesses only individuals and businesses individuals only neither individuals nor businesses

individuals and businesses

Because _____ responds slowly to changes in policy or economic conditions, the Fed can influence the real interest rate by changing the nominal interest rate. the Federal Open Market Committee the federal funds rate inflation Congress

inflation

The Fed takes steps to eliminate expansionary gaps because they lead to _____. deflation a fall in investment spending inflation a fall in consumer spending

inflation

The federal funds rate: is an official government interest rate is closely watched by the public, politicians, the media and the financial markets is the interest rate that commercial banks charge each other for very short-term loans

is closely watched by the public, politicians, the media and the financial markets is the interest rate that commercial banks charge each other for very short-term loans

The nominal interest rate will fall if the quantity of money demanded is _____ the quantity of money supplied. equal to greater than less than

less than

Part of the cost of holding money is that it typically yields a _____ rate of return than stocks and bonds. lower higher

lower

Large-scale asset purchase programs were designed to lower shorter-term interest rates once the federal funds rate reached its zero lower bound. lower longer-term interest rates once the federal funds rate reached its zero lower bound. raise shorter-term interest rates once the federal funds rate reached its zero lower bound. raise longer-term interest rates once the federal funds rate reached its zero lower bound.

lower longer-term interest rates once the federal funds rate reached its zero lower bound.

Banks typically borrow from other banks over very short periods of time (usually overnight) in order to: meet their legal reserve requirements pay their operating expenses make money

meet their legal reserve requirements

The federal funds rate is closely watched by the public, politicians, the media and the financial markets because it is a strong indicator of the Fed's plans for _____. monetary policy fiscal policy banking regulation deficit spending

monetary policy

People typically choose to hold some of their wealth in the form of _____ in order to make it easier to carry out daily transactions such as buying groceries. bonds stocks money precious metals

money

The principal benefit of holding ______ is its usefulness in carrying out transactions such as buying gas or paying for a movie ticket. a bond gold a stock money

money

In the market for money, the equilibrium _______ equates the quantity of money supplied with the quantity of money demanded. output price level of output per capita GDP nominal interest rate

nominal interest rate

The money demand curve relates the aggregate quantity of money demanded to the _____. real price level real interest rate rate of inflation nominal interest rate

nominal interest rate

The money demand curve shows the relationship between the _____ and the aggregate quantity of money demanded. rate of inflation nominal interest rate nominal price level real interest rate

nominal interest rate

The opportunity cost of holding money is the: nominal interest rate rate of inflation marginal tax rate saving rate

nominal interest rate

The Fed targets the federal funds rate through _______. open-market operations closed-market operations fractional-reserve banking deposit insurance

open-market operations

If the Fed wants to lower the federal funds rate, it conducts open-market _____. purchases sales

purchases

The Fed can lower the federal funds rate by: purchasing government bonds from the public selling government bonds to the public

purchasing government bonds from the public

When the Fed buys long-term financial assets, thereby lowering their yield and increasing the money supply it is known as ______ easing.

quantitative

The money demand curve will shift to the left if:

real GDP decreases.

The demand for money will fall if: nominal interest rates fall the price level increases real income decreases real income increases

real income decreases

The Fed takes steps to decrease the real interest rate in order to eliminate ______ gaps. expansionary both expansionary and recessionary recessionary

recessionary

Which of the following is consistent with monetary-policy normalization? increasing holdings of longer-term assets acquired during quantitative easing programs reduce holdings of longer-term assets acquired during quantitative easing programs lowering the federal funds rate by raising the rate paid to banks on required reserves raising the federal funds rate by raising the rate paid to banks on required reserves

reduce holdings of longer-term assets acquired during quantitative easing programs raising the federal funds rate by raising the rate paid to banks on required reserves

The development of credit cards, debit cards and ATM machines has _____ the amount of money people need to carry out routine transactions. increased had little effect on reduced

reduced

The minimum values of the ratio bank reserves to bank deposits that the Fed allows commercial banks to maintain are known as: reserve requirements deposit insurance the discount rate the discount window

reserve requirements

The minimum values of the ratio bank reserves to bank deposits that the Fed allows commercial banks to maintain are known as: reserve requirements the discount rate the discount window deposit insurance

reserve requirements

Because discount window lending increases banks' _____, it increases the money supply. reserves reserve requirements interest rate

reserves

If the quantity of money demanded is greater than the quantity of money supplied, then the nominal interest rate will _____. remain fixed rise fall

rise

The Fed has the greatest control over the real interest rate in the _____. short run long run

short run

The Fed can influence the real interest rate by changing the nominal interest rate because inflation changes _____ in response to changes in policy or economic conditions. quickly unpredictably slowly

slowly

When the Fed takes steps to influence the federal funds rate, other interest rates: tend to move in the same direction tend to move in the opposite direction are largely unaffected

tend to move in the same direction

The amount of wealth an individual chooses to hold in the form of money is: the amount of money the individual chooses to keep in the bank. the amount of money the individual likes to spend on government bonds. that individual's demand for money. that individual's consumption expenditure.

that individual's demand for money.

Forward guidance refers to commercial banks providing information about its future monetary-policy path. the Fed providing information about its future monetary-policy path. stock brokers providing information about the government's future monetary-policy path. the government providing information about its future monetary-policy path.

the Fed providing information about its future monetary-policy path.

In the United States, the money supply is determined by the Federal Reserve the nominal interest rate the rate of inflation the United States Treasury

the Federal Reserve

The real interest rate equals: the nominal interest rate divided by the rate of inflation the nominal interest rate minus the rate of inflation the rate of inflation minus the nominal interest rate the nominal interest rate times the rate of inflation

the nominal interest rate minus the rate of inflation

If the Fed reaches the zero lower bound, ______. the rate on federal funds rate is between 0 and 0.25 percent the only way to stimulate the economy is to raise the federal funds rate the only way to stimulate the economy is to lower the federal funds rate stimulating the economy by lowering the federal funds rate is not possible

the rate on federal funds rate is between 0 and 0.25 percent stimulating the economy by lowering the federal funds rate is not possible

Reserve requirements are the minimum values of _________ that the Fed allows commercial banks to maintain. the ratio of bank reserves to bank deposits the nominal interest rate the federal funds rate the ratio of bank deposits to bank reserves

the ratio of bank reserves to bank deposits

A change in the requirement, an open market operation, or a change in the discount window rate are all examples of the tools of monetary policy. the tools of fiscal policy the tools of the Treasury Department the tools of government spending

the tools of monetary policy.

The Federal Reserve can control the money supply (select all that apply): through discount window lending by printing money by changing commercial banks' reserve requirements through open-market operations

through discount window lending by changing commercial banks' reserve requirements through open-market operations

Money is a: way of holding wealth type of financial asset store of value price

way of holding wealth type of financial asset store of value

An individual's demand for money is the amount of _____. income an individual would like to earn each year wealth an individual chooses to hold in the form of money money an individual is paid by his or her employer

wealth an individual chooses to hold in the form of money