Chapter 15 Macroeconomics
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 goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of __________, it also can achieve the goal of ________________ simultaneously.
high employment; economic growth
According to the Taylor rule... , what is the federal funds target rate under the following conditions? Equilibrium real federal funds rate equals 44% Target rate of inflation equals 44% Current inflation rate equals 33% Real GDP is 11% below potential real GDP The federal funds target rate equals ___
6%
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.
Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?
The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule.
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? (Mark all that apply.)
The value of the dollar Consumption of durable goods Business investment projects
In the figure to the right, when the money supply increased from MS 1MS1 , the equilibrium interest rate fell from 4% to 3%. Why?
All of the above. Increased demand for Treasury securities drives up their prices. Increased demand for Treasury securities drives down their interest rate. Initially, firms hold more money than they want relative to other financial assets.
What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?
"Fannie Mae" and "Freddie Mac"
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 2AD2 to AD Subscript 2 comma policyAD2, 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
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. What policy would the Fed likely pursue in order to move AD 2AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium (point C) in the second period?
Open market purchase of government securities.
If the Federal Reserve is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the recession, the poor timing caused another problem: inflation. This is an example of what type of policy?
Procyclical policy
What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? If the Fed's policy is successful, what is the effect on the following indicators?
The Fed will pursue a contractionary monetary policy. decrease does not change decrease increase
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
When the Federal Open Market Committee (FOMC) decides to increase the money supply it _____, U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it ___ U.S. Treasury securities..
buys ; sells
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves.
Why did the Fed help JP Morgan Chase buy Bear Stearns?
Commercial banks would be reluctant to lend to investment banks. B. Failure of Bear Stearns would lead to a larger investment bank failure.
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation.
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 to AD2 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 increase does not change increase decrease
In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD 1MD1 to MD 2MD2 (Point A to Point C)?
Increase in real GDP or increase in the price level
How do investment banks differ from commercial banks? (Mark all that apply.)
Investment banks generally do not lend to households. Investment banks do not take deposits.
Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?
Low prices
The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06LRAS06, we would expect the Federal Reserve Bank to pursue _____ monetary policy. If the Fed's policy is successful, what is the effect of the policy on the following macroeconomic indicators? Actual real GDP Potential real GDP Price level unemployment
a contractionary decreases does not change decreases increases
The _____ is considered the most relevant interest rate when conducting monetary policy.
short-term nominal interest rate
