Econ final

What is a banking​ panic?

A situation in which many banks experience runs at the same time.

Who borrows money and who lends money at this​ "target interest​ rate"?

Banks borrow and banks lend.

Why might the tax multiplier have a larger value after two years than after one​ year?

Consumers are more likely to perceive the tax change as permanent and change their spending choices.

Increased government debt can lead to higher interest rates​ and, as a​ result, crowding out of private investment spending. In terms of borrowing​ (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the​ economy?

Debt-spending on research and development. ​Debt-spending on highways and ports. ​Debt-spending on education.

In what ways does the federal budget serve as an automatic stabilizer for the​ economy?

During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both effects help to stabilize aggregate demand.

Explain how​ "governments' thirst for​ funds" could lead to crowding out. Why would crowding out reduce economic​ growth?

Government borrowing increases the demand for​ funds, causing interest rates to rise. Increases in interest rates reduce​ investment, which is likely to reduce economic growth.

Which of the following is not a problem of high inflation​ rates?

High inflation helps to stabilize financial markets.

Which of the following best describes the difference between crowding out in the short run and in the long​ run?

In the short​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

Which can be changed more​ quickly: monetary policy or fiscal​ policy?

Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy

The Goals of Monetary Policy

Promote economic growth by increasing real GDP Low and stable inflation Low unemployment rates Stable financial markets

Why is price stability one of the​ Fed's monetary policy ​goals?

Rising prices erode the value of money as a medium of exchange and store of value. By achieving price​ stability, the Fed also promotes economic growth. If inflation is​ low, the Fed will have flexibility to lessen the impact of recessions.

Which of the following best explains how the Federal Reserve acts to help prevent banking​ panics?

The Fed acts as a lender of last​ resort, making loans to banks so that they can pay off depositors.

What is the discount​ rate?

The discount rate is the rate at which the Fed lends to banks.

What is the difference between the federal budget deficit and federal government​ debt?

The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.

Why might increasing taxes as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing​ inflation?

The legislative process experiences longer delays than monetary policy

During which period will the quantity theory of money be more useful in explaining changes in the inflation​ rate?

The period where velocity is constant because when velocity is constant the changes in the money supply can be shown to be the main cause of inflation.

How does the quantity theory provide an explanation about the cause of ​ inflation?

The quantity equation shows that if the money supply grows at a faster rate than real​ GDP, then there will be inflation.

What effect would the elimination of money have on the​ economy?

There would be additional costs imposed as the economy found a replacement for money to facilitate transactions.

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending?

Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending.

What is the relationship between the federal funds rate falling and the money supply​ increasing?

To decrease the federal funds​ rate, the Fed must increase the money supply

How does lowering the target for the federal funds rate​ "pour money" into the banking​ system?

To increase the money​ supply, the Fed buys bonds on the open​ market, which increases bank reserves.

Why might the effects on health of a temporary increase or decrease in income be different than the effects of a permanent increase or​ decrease?

With a temporary decrease in income due to a​ recession, people have more time to​ exercise, eat​ healthier, lose​ weight, and experience less stress. In the long​ run, permanent increases in income are associated with improved health.

Which one of the following is not one of the policy tools the Fed uses to control the money​ supply? A. moral suasion B. discount policy C. Reserve requirements D. open market operations

a

Which tool is the most​ important? A. The Fed conducts monetary policy principally through open market operations. B. The Fed conducts monetary policy principally by changing the reserve requirement. C. The Fed conducts monetary policy principally through discount policy. D. The Fed conducts monetary policy principally by tax cuts and government spending increases.

a

A decrease in the federal​ government's budget surplus can be the result of

a recession an increase in government purchases

a bank will consider a car loan to a customer a __________ and a customers checking account to be _______

an asset; liability

assets

anything of value owned by a person or a firm

liabilities

anything owed by a person or firm

if the federal reserve conducts expansionary monetary, they __________ securities and ____________ the money supply, which causes interest rates

buy; increase; decrease

which of the following assets is most liquid

cash

not one of the primary responsibilities of the federal reserve

collect income taxes

This is when banks make loans to businesses.

commercial lending

a decline in private expenditures as a result of increases in government purchases.

crowding out

One-time tax​ rebates, such as those in 2001 and​ 2008, increase consumption spending by less than a permanent tax cut because​ one-time tax rebates increase

current income

Which one of the following is not one of the monetary policy goals of the​ Fed? A. Maintain high employment. B. Maintain price stability. C. Maintain stability of financial markets and institutions. D. Reduce income inequality.

d

an increase in interest rates

decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods and net exports

contractionary monetary policy

decreases the money supply and increases the interest rates

reserves

deposits that a bank keeps as cash in its vault

is the rate that banks charge each other for​ short-term loans of excess reserves.

federal funds rate

The U.S. dollar can best be described as

fiat money

barter economies

goods and services traded for other goods and services

Which of the following accurately defines the government purchases multiplier and the tax​ multiplier?

gov purchases multiplier = change in equilibrium real GDP/ change in government purchases and the tax multiplier = change in equilibrium real gdp/ change in taxes

gov deficit federal debt = gov surplus federal debt=

grows shrinks

using the money demand and money supply model an open market sale of treasury securities by the federal reserve would cause the interest rate to

increase

expansionary monetary polcy

increase money supply and decreases the interest rates

an increase in the interest rate should ____________ the demand for dollars and the value of the dollar, and net exports should _____________

increase; decrease

if the fed is concerned about rising inflation they will ____________ the discount rate on the discount loans to bank which will result in a ___________ in banks reserves

increase; decrease

if the federal reserve conducts expansionary monetary policy, exports will ________ and imports will __________

increase; decrease

the fed purchases $500 million in bonds consumer spending will ________ because __________

increase; falling interest rates will increase spending

In terms of its effect on the​ long-run growth rate of real​ GDP, it is likely to matter more if the additional government spending involves

increased spending on highways and bridges.

if the legally required reserve ratio is _________ most likely we will see banks' reserves ______________

increased; decrease

banks can make additional loans when required reserves are

less than total reserves

fiat money

little to no intrinsic value and is authorized by the central bank or governmental body

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy goals

monetary policy

According to the multiplier effect an initial increase in government purchases increases real GDP by --- --- the initial increase in government purchases.

more than

The series of induced increases in consumption spending that results from the initial increase in autonomous expenditures

multiplier effect

A theory of the connection between money and prices that assumes that the velocity of money is constant.

quantity theory of money

major assets on a banks balance sheet are its

reserves, loans, and holdings of securities

the most relevant interest rate when conducting monetary policy

short-term nominal interest rate

the federal reserve focuses on ___________ as their monetary policy

the federal funds rate

required reserve ratio

the minimum fraction of deposits banks are required by law to keep

bank reserves include

vault cash and deposits with the federal reserve

The average number of times each dollar in the money supply is used to purchase goods and services included in GDP.

velocity of money

Does government spending ever reduce private​ spending?

yes, due to crowding out