Economics Final

According to the Phillips curve, if the

inflation rate is rising, the economy is booming

Consider the simple monetary policy rule. The current rate of inflation exceed the target inflation rate by 1%. If m(bar) = 0.25 and the marginal product of capital is 3%, what should the real interest rate be?

3.25% math: Rt - r(bar) = m(bar)*(pi(t)-pi(bar)) Rt - 3 = 0.25(1) Rt = 3.25

The central bank pursues expansionary monetary policy and economic agents build this into their decision making, _____ will rise with no economic benefit; this is called _____ problem.

(1) Inflation (2) Time consistency

In the IS/MP, the Fed _____ the federal funds rate in the aftermath of the decline in housing market; the collapse of housing prices also raised the _____, pushing _____ the real interest.

(1) Lowered (2) Risk (3) Up

In 2008, oil prices jumped about 100 percent from the previous year. The initial response would be _____, pushing inflation _____ and output to _____ in the short run.

(1) The AS to shift left (2) Up (3) Fall

Prior to the recent financial crisis, the bulk of the Fed's assets on its balance sheet were _____ and its liabilities were _____

(1) U.S. Treasury bills (2) Currency

If the central bank is targeting the money supply, the money supply is _____ and _____ with respect to the nominal interest rate

(1) Whatever level is dictated by the central bank (2) is vertical

Inflation is equal to 4%. Predict the nominal interest rate if the marginal product of capital is 2%, the inflation target is 2%, and m(bar) = 0.5

7% math: i(t) = R(t) + pi(t) = r(bar) + pi(t) + m(bar)*(pi(t)-pi) i(t) = 4 + 2 + 0.5(4-2) i(t) = 7

Which of the following best describes movement along the AD curve?

A change in the inflation rate causes the central bank to change interest rates, causing a change in investment

Which of the following is an example of moral hazard?

A person with automobile insurance is less likely to drive carefully

The amount of deposits that a bank must hold in its vaults is called

A required reserve

Price-setting behaviors become more sensitive to demand conditions. This results in

A smaller recession occurring to change the inflation rate by a given amount

The aggregate demand curve slopes downward because

According to the monetary policy rule, the response of policymakers is to increase the interest rate if inflation is high

Misperceiving a long-lasting slowdown in labor productivity as a recession will result in

An increase in inflation

Economists today believe that the Phillips curve demonstrates that the level of inflation is related to economic activity and that there is a permanent trade-off between inflation and economic performance

False

If British incomes rose, this would be reflected in the short-run model as a shift in the U.S. AS to the right.

False

The liquidity trap occurs when

Nominal interest rates are close to zero.

When there is deflation,

The central bank cannot push the real interest rate to zero.

An economy starts at its long-run values. A recession will then cause

The inflation rate to decrease because firms seek to sell more

The federal funds rate is

The interest rate at which banks borrow from and loan to each other overnight

Suppose that a shock to the economy increases the bargaining power of labor unions. The Phillips curve will shift upward

True

The AS curve slopes upward because firms raise their prices by more than usual when they are faced with actual output above potential output

True

The American Recovery and Reinvestment Act of 2009 contained more additional spending in government purchases than in tax cuts

True

The rate of inflation during the past year was 3%. If firms expect higher demand for their products, you expect inflation during the coming year to be _____ than during the past year because _____.

(1) Higher (2) Firms are producing more than potential

The MP curve stands for _____ and describes how _____.

(1) Monetary policy (2) The Federal Reserve sets the nominal interest rate

On the aggregate supply curve, an increase in inflation causes _____, whereas a price shock causes _____.

(1) Upward movement along the curve (2) The curve to shift

The current rate of inflation exceeds the target inflation rate by 2% and there are no shocks to the economy. If m(bar) = 0.25, b(bar) = 0.5 and v(bar) = 0.5, the change in inflation is equal to _____.

0.125% math: Yt = a-bm(pit-pi) Yt = 0.5*0.25(2) = .25 change in pi = pi(t-1)-vYt+O change in pi = 0.5*0.25 = 0.125

Suppose the Federal Reserve decreases interest rates from 4% to 3%, which leads to an increase in short-run output of 1.5%. If there are no other shocks to the economy, and the resulting change in inflation is +0.375%, what is the value of the parameter v(bar)?

0.25 math: 0.375/1.5

The current rate of inflation exceeds the target inflation rate by 2%. If m(bar) = 0.25, b(bar) = 0.5, and there are no aggregate demand shocks, short-run output will be equal to _____.

0.25% math: Yt = a-bm(pit-pi) Yt = 0.5*0.25(2) = .25

Inflation has been moderate in some industrialized countries since the 1970s because

1. Economists have started using more sophisticated monetary policy rules 2. There haven't been any large price shocks 3. Of the use of inflation targeting

Why does the classical dichotomy fail to hold in the short-run

1. Firms have imperfect information 2. Unions negotiate contracts that set wages for long periods of time 3. Sometimes people think it is unfair to lower nominal wages

An advantage of explicit inflation targeting if that

1. It helps to anchor inflation expectations 2. It helps make it easier to the central bank to stabilize output 3. It makes firms less tempted to deviate from standard price-setting behavior

Which of the following changes will increase short-run output

An increase in the target rate of inflation

Interest rates at long maturities

Are equal to the average of the short-term rates expected by investors in the future

Which of these features is not a part of a proposed financial reform?

Bailing out financial institutions that are too big to fail

In the presence of rational expectations, the central banks' willingness to battle inflation

Becomes a determinant of expected inflation

How can a deflationary spiral be avoided by the central bank?

By stimulating the economy with monetary policy

According to Ben Bernanke, which of the following policies should be used to manage bubbles?

Capital requirements and regulation of lending standards

The simple monetary policy rule discussed in the chapter "dictates" the

Choice of federal funds rate

When the Federal Reserve wants to increase the money supply, it

Conducts open-market purchases

The Federal Reserve will lower short-run output by

Decreasing the money supply

The financial friction, or risk premium, is the

Difference between the federal funds rate and interest rates in financial markets.

During the _____, the actual federal funds rate was substantially lower than the rate suggested by the simple Taylor rule

Early 1990s

Of the following, which is NOT something that the Troubled Asset Relief Program was used to finance?

Expanding lending by the Federal Reserve

If the Federal Reserve had followed the Taylor rule from the previous chapter during the Great Recession, interest rates would have been about the same as the interest rates the Federal Reserve actually implemented during the recession

False

If the inflation rate is plotted on the vertical axis and short-run output is plotted on the horizontal axis, over time, the short-run model will predict that the economy will evolve in clockwise loops

False

Loose monetary policy is one explanation for the Great Depression

False

The Troubled Asset Relief Program established a $700 billion fund to purchase assets held by financial institutions and is expected to have a cost of $700 billion to taxpayers

False

The nominal interest rate must always be higher than the real interest rate

False

The total cost of bailing out the financial institutions can be measured solely by the amount of tax revenue spent on the bailouts

False

Under rational expectations, people use only the simplest information to make forecasts on the inflation rate

False

Unlike fiscal policy, which often takes months to have substantial effects on the economy, the effect on economic activity of monetary policy is instantaneous

False

Suppose the Fed funds rate has hit the zero lower bound. Which of the following might the Federal Reserve engage in to stimulate the economy?

Generate a higher rate of inflation

Between approximately 2001 and 2006, the Taylor rule predicted that the federal funds rate was

Greater than the actual federal funds rate

Suppose prices adjust immediately because there is no sticky inflation. Then, monetary policy will

Have only nominal effects

Which of the following statements is NOT true?

In the classical dichotomy, some prices are sticky

Economists believe that the way that policy makers handled the 2008 financial crisis

Increases moral hazard

The Taylor rule expresses the federal funds rate as the weighted average of

Inflation and short-run output.

According to the Phillips curve, if current output equals potential output,

Inflations will be steady

All economies are open. A recession in Europe decreases demand for U.S. goods. The U.S. economy will have

Initially lower inflation and short-run output, but in the long-run will have the same long-run steady state as before the shock.

The risk premium

Is higher in uncertain economic situations

The nominal interest rate

Is the opportunity cost of holding money

The current chairman of the Federal Reserve is

Janet Yellen

Since the 1990s, the country with the lowest rate of inflation has been

Japan

If m_bar is relatively high,

Monetary policy is relatively aggressive, and the AD curve is relatively flat.

In the aftermath of the financial crisis that began in 2008, the Fed's assets grew primarily as

Mortgage-backed securities

Which of the following categories of assets on the Federal Reserve's balance sheet experienced the largest increase between 2008 and 2009?

Mortgage-backed securities

If the central bank reduces the money supply, the

Nominal interest rate will rise and individuals will hold less money

If the aggregate demand parameter increases and the central bank wishes to stabilize output at potential, it should

Raise the nominal interest rate

According to the Fisher equation, the nominal interest rate is equal to the

Real interest rate plus the rate of inflation

Suppose an economy is hit with a positive oil price shock in one period that raises the level of oil prices permanently. If adaptive expectations hold, this will

Shift the AS curve up initially and gradually shift the AS curve back to its original position over time

A decrease in the financial friction will

Shift the aggregate demand curve to the right

When we add financial risk to the AD curve, it

Shifts the AD curve down

When a risk premium is added to the short-run model, it

Shifts the MP curve up.

Suppose that a shock to the economy reduces consumer wealth, which lowers consumption while simultaneously increasing the financial friction. Which of the following will characterize the outcome after the shock but before any policy intervention by the Federal Reserve?

Short-run output will fall, and the real interest rate will rise

Policy is conducted by discretion if policy makers

Size up the economy and choose whatever policy seems appropriate at the time

The money demand curve

Slopes downward with respect to the nominal interest rate

The adjustment process to return to the steady state equilibrium in the short-run model depends on the

Slow adjustment of inflation reflected in the aggregate supply curve

Adaptive expectations imply that firms

Slowly adjust their inflation expectations

A key assumption of the short-run model is

Sticky inflation

If the central bank targets the interest rate, the money

Supply curve will be flat

The equation used to predict the federal funds rate is called the

Taylor rule

If Mexico lowers its inflation target from 3 percent to 2 percent, the initial response to this will be

That the AD will shift left

The high growth rates of money in the late 2000s were likely due to

The Fed's concern about deflation

Suppose that a shock to the macroeconomy lowers financial frictions. Which of the following curves shifts and in which direction?

The MP curve shifts down

The aggregate supply (AS) curve is derived from

The Phillips curve

Combining the IS and monetary policy rule curves results in

The aggregate demand curve

An increase in the growth rate of real GDP will lower inflation in the long-run and increase inflation in the short-run

True

As the zero lower bound is approached, monetary policy falls into a liquidity trap

True

At the interest rate targeted by the central bank, the money supply is horizontal

True

Between 2006 and 2008, as the Fed cut interest rates, ten-year Treasury yields fell and the yield on corporate bonds rose

True

Constrained discretion is a combination of inflation targeting in the long-run and discretionary policy in the short-run

True

The effects of the 9/11 attacks were a leftward shift in the AD curve and short-run output fell along the AS curve

True

The simple monetary policy rule we have specified in the text implicitly responds to changes in output

True

When the economy is experiencing deflation, it is preferable to use the IS/MP diagram as opposed to the AS/AD diagram in order to analyze the economy

True