Chapter 15 Final Review
What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?
"Fannie Mae" and "Freddie Mac"
The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model What would be the Fed's reaction if actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06? That is, what step will the Fed likely take to control inflation in the second period?
An open market sale of government securities.
Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand?
Business investment projects Consumption of durable goods The value of the dollar
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation.
How does the fed conduct expansionary monetary policy?
Decrease discount rate, decrease in reserve requirement and conduct open market purchase of government securities
How does the fed conduct expansionary fiscal policy?
Decrease taxes Increase government spending
In the figure to the right, the opportunity cost of holding money ___________ when moving from Point A to Point B on the money demand curve.
Decreases
The figure to the right illustrates a dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD 2 to AD 2 comma policy and reach equilibrium (point C) in the second period? If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators? Actual real GDP: Potential real GDP: Price level: Unemployment:
Expansionary monetary policy Increases Does not change Increases Decreases
What is the goal of fiscal policy?
High employment, price stability, high growth rates
The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except:
High unemployment.
How does the fed conduct contractionary monetary policy?
Increase discount rate, increase in reserve requirement and conduct open market purchase of government securities
In the figure to the right, the economy experiences inflation in the second period. What would be the Fed's reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS 2?
Increase interest rates Open market sale of government securities Contractionary policy
In the figure to the right, when the money supply increased from MS 1 to MS 2, the equilibrium interest rate fell from 4% to 3%. Why?
Increased demand for Treasury securities drives up their prices. Initially, firms hold more money than they want relative to other financial assets. Increased demand for Treasury securities drives down their interest rate.
How does the fed conduct contractionary fiscal policy?
Increasing taxes on individuals and businesses Decreasing government spending on goods and services
How do investment banks differ from commercial banks?
Investment banks do not take deposits. Investment banks generally do not lend to households.
Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?
Low prices
Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?
No. The Fed cannot target both the money supply and the interest rate simultaneously.
Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD 2 comma policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)
Open market purchase of government securities
Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period?
Open market purchase of government securities.
What is the goal of monetary policy?
Price stability, full employment, and economic growth
The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions?
The Fed can only soften the magnitude of recessions, not eliminate them
As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?
The federal funds rate
What is the federal funds rate?
The interest rate banks charge each other for overnight loans
What is the discount rate?
The minimum interest rate set by the Federal Reserve for lending to other banks.
What are the Fed's main monetary policy targets?
The money supply and interest rates
