Econ Quiz 15
Why might European governments have felt the need to support their banks in order to avoid another Lehman moment
The European governments wanted to avoid wider economic repercussions resulting from bank failures that could undermine the financial positions of other firms and lead to a further reduction in prices of financial assets.
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
In the graph of the money market shown on the right, what could cause the money supply curve to shift from MS1 to MS2?
The Fed decreases the money supply by deciding to sell U.S. Treasury securities.
Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP.
Which of the following statements is true about the Fed's monetary policy targets?
The Fed is forced to choose between the interest rate and the money supply as its monetary policy target.
If the Fed would no longer have a specific target for the money supply, it would be targeting the
federal funds rate.
In terms of the economy, "just as the party gets going" refers to a situation in which real GDP....... potential GDP, which will result in .... the inflation rate
is greater than an increase in
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves.
A countercyclical policy is one that
is used to attempt to stabilize the economy.
The primary reason for this change in the sources of mortgage finance was _____; the consequence of this change was also _____ in mortgage rates.
the development of a secondary mortgage market; a decrease
As the interest rate increases,
consumption, investment, and net exports decrease; aggregate demand decreases.
When the Federal Reserve increases the discount rate as a part of a contractionary monetary policy, there is:
A decrease in the money supply and an increase in the interest rate.
What is a banking panic?
A situation in which many banks experience runs at the same time.
Which of the following was the Fed's objective in using "quantitative easing" and "Operation Twist"?
All of the above.
All of the following are arguments against an explicit inflation targeting rule for monetary policy except:
An explicit target is easier to understand by households and firms which makes monetary policy more transparent.
In the graph of the money market shown on the right, what could cause the money demand curve to shift from MD1 to MD2?
Both (a) and (c).
n the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD1 to MD2 (Point A to Point C)?
Increase in real GDP or increase in the price level
The Taylor rule for federal funds rate targeting does which of the following?
It links the Fed's target for the federal funds rate to economic variables.
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
Which of the following is not an issue with using active monetary policy to reduce business cycles?
Real GDP and employment changes from monetary policy actions can move in a countercyclical manner.
Monetary policy is defined as:
The actions the Federal Reserve takes to manage the money supply and interest rates.
Which of the following is not a viable monetary policy target for the Fed?
The money demand.
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.
What did the article mean by a "Lehman moment"? A "Lehman moment" meant
a deepening of the financial crisis brought about by bankruptcy of a major bank.
Which of the following is not one of the monetary policy goals of the Federal Reserve ("the Fed")?
a high foreign exchange rate of the U.S. dollar relative to other currencies
According to the Taylor Rule, if the Fed reduces its target for the inflation rate, the result will be
a higher target federal funds rate.
"I understand why the Fed uses expansionary policy but I don't understand why it would ever use contractionary policy. Why would the government ever want the economy to contract?" The government would want the economy to contract when real GDP is
above potential GDP and the price level is rising
In the quote, when the official says "the money stays in banks," he is referring to.... in the reserves in banks.
an increase
The reason for this may have been a lack of
borrowers
If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to
buy U.S. Treasury securities.
What is "quantitative easing"? Quantitative easing involved the Fed's
buying longer term Treasury securities that are not usually involved in open market operations.
When the Fed conducts an open market purchase, the Fed ..... and the money supply
buys securities from banks increases
When he said "to remove the punchbowl," he meant to engage in... policy
contractionary
When the Fed conducts an open market purchase, the interest rate should
decrease
The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called
expansionary monetary policy.
This statement is true because the Chairman of the Fed
has the ability to influence interest rates for the world's top reserve currency.
If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then
inflation will be higher than if the Fed had not acted
But the real problem was that banks were not...the reserves.
lending
An increase in interest rates affects aggregate demand by
shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level.
Which of these variables are the main monetary policy targets of the Fed?
the money supply and the interest rate
If the FOMC orders the trading desk to sell Treasury securities,
the money supply curve will shift to the left, and the equilibrium interest rate will rise.
One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal,
the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent
The Fed gave up targeting the money supply because
the relationship between monetary aggregates and other economic variables was becoming unreliable.
What is "Operation Twist"? "Operation Twist" refers to
the Fed's program to purchase $400 billion in long-term Treasury securities while selling an equal amount of shorter-term Treasury securities.
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.
