Macro Econ Chapters 16,17,18

The graph at right shows the current position of the Phillips curve. The natural rate of unemployment in this economy is known to be​ 5%. When the economy is at the natural rate of​ unemployment, inflation is currently expected to be__%. ​(Round your response to the nearest​ integer.) Suppose that there is a change in expectations about inflation. Inflation is now expected to be​ 3% when the economy is at full employment.

0

The annual rate of growth of real GDP in a developing nation is 0.4 percent.​ Initially, the​ country's population was stable from year to year.​ Recently, however, a significant increase in the​ nation's birthrate has raised the annual rate of population growth to 0.5 percent. Calculate the rate of growth of per capita real GDP before the increase in population growth. ___ percent. ​(Enter your response as a percentage rounded to one decimal​ place.) If the rate of growth of real GDP remains​ unchanged, calculate the new rate of growth of per capita real GDP following the increase in the birthrate. ___ percent. ​(Enter your response as a percentage rounded to one decimal​ place.)

0.4 percent. -0.1 percent. -------------------- Rate of growth of per capita real GDP = Rate of growth of Real GDP - Rate of growth of population​, we can solve for Per capita real GDP growth​ rate, when the values of real GDP growth rate and population growth rate are given. Note that in this​ case, population was increasing significantly.

The rate of growth of real GDP is 4​%, and the rate of growth of the population is 3​%. The rate of growth of per capita real GDP is ___​%. ​(Round your response to the nearest whole​ percent.)

1%.

Assume that the following conditions​ exist: a. All banks are fully loaned​ up- there are no excess​ reserves, and desired excess reserves are always zero. b. The money multiplier is 5. c. The planned investment schedule is such that at a 4 percent rate of​ interest, Investment ​=$1380 billion. At 5​ percent, investment is ​$1370 billion. d. The investment multiplier is 3. e. The initial equilibrium level of real GDP is ​$12 trillion. f. The equilibrium rate of interest is 4 percent Now the Fed engages in contractionary monetary policy. It sells ​$1billion worth of​ bonds, which reduces the money​ supply, which in turn raises the market rate of interest by 1 percentage point. Calculate the decrease in money supply after​ FED's sale of​ bonds: ​$___billion. Equilibrium GDP decreases​ by: ​$___billion. Calculate the new equilibrium level of real​ GDP: ​$___trillion. ​(Round your answer to two decimal​ places.)

1) 5 billion ( 1bn x 5 = 5) 2) 30 billion (1370 - 1380 = negative 10; 10 x 3 = 30) [NOTE: you can not post the negative sign, thus your answer is 30 (but remember its a negative for the next question)]. 3) 11.97 trillion (12tr + negative 30 bn = 11.97)

Suppose that each 0.1 percentage point decrease in the equilibrium interest rate induces a​ $10 billion increase in real planned investment spending by businesses. In​ addition, the autonomous spending multiplier is 5 and the money multiplier is equal to 3. ​Furthermore, every​ $20 billion increase in the money supply brings about a 0.1 percentage point reduction in the equilibrium interest rate. 1) How much must real planned investment increase if the Fed desires to bring about a ​$200 billion increase in real​ GDP? A. ​$40 billion. B. ​$200 billion. C. ​$1,000billion. D. ​$67 billion. 2) What dollar amount of open market operations must the Fed undertake to bring about the money supply change you calculated in the previous​ question? A. ​$67 billion. B. ​$27 billion. C. ​$200 billion. D. $80 billion.

1) A. ​$40 billion. ($200/5) ----- 2) A. ​$67 billion. ($200/3 = 66.66 rounded to 67)

1) Contractionary monetary policy causes the A. amount of government spending to increase. B. dollar value of real GDP to increase. C. interest rate to increase. D. price level to increase. 2) The net export effect of contractionary monetary policy predicts that a​ country's A. exports decrease as the money supply contracts. B. imports decrease as the money supply contracts. C. value of currency depreciates as the money supply contracts. D. experience will include all of the above.

1) C. interest rate to increase. 2) A. exports decrease as the money supply contracts.

1) Contractionary monetary policy causes the A. dollar value of real GDP to increase. B. amount of government spending to increase. C. interest rate to increase. D. price level to increase. 2) The net export effect of contractionary monetary policy predicts that a​ country's A. imports decrease as the money supply contracts. B. value of currency depreciates as the money supply contracts. C. exports decrease as the money supply contracts. D. experience will include all of the above.

1) C. interest rate to increase. 2) C. exports decrease as the money supply contracts.

Which of the following is a true​ statement? A. The direct effect of an expansionary monetary policy is to increase aggregate supply and the indirect effect is to increase aggregate demand. B. The direct effect of an expansionary monetary policy is to increase consumption spending and the indirect effect is to increase interest rates. C. The direct effect of an expansionary monetary policy is to increase aggregate demand and the indirect effect is to increase aggregate supply. D. Both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand. The indirect effect of an increase in the money supply works through A. an increase in the stock exchange index indicating an improvement in​ investors' optimism increasing investment. B. an improvement in​ consumers' expectations causing aggregate demand to increase. C. a decrease in the interest rate increasing investment and consumption. D. an increase in consumption due to increases in household money balances.

1) D. Both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand. 2) C. a decrease in the interest rate increasing investment and consumption.

Suppose that each 0.1 percentage point decrease in the equilibrium interest rate induces a​ $10 billion increase in real planned investment spending by businesses. In​ addition, the autonomous spending multiplier is 3 and the money multiplier is equal to 2. ​Furthermore, every​ $20 billion increase in the money supply brings about a 0.1 percentage point reduction in the equilibrium interest rate. 1) How much must real planned investment increase if the Fed desires to bring about a ​$300 billion increase in real​ GDP? A. ​$150 billion. B. ​$900 billion. C. ​$300 billion. D. ​$100 billion. 2) What dollar amount of open market operations must the Fed undertake to bring about the money supply change you calculated in the previous​ question? A. $100 billion. B. ​$300 billion. C. ​$200 billion. D. ​$150 billion.

1) D. ​$100 billion. (300 / 3 = 100) Change in investment​ = (desired change in real​ GDP)/(autonomous multiplier) 2) A. $100 billion.

If there is a recessionary gap in the short​ run, the Federal Reserve can eliminate the gap in the short run by undertaking a policy action that raises aggregate demand.​ But, if Federal Reserve chooses not to close the gap in the short​ run, the economy will eventually get back to full employment in the long run. Because when there is a recessionary gap in the short​ run, then in the long run a new equilibrium will arise as input prices and expectations adjust​ downward, causing the aggregate supply to shift downward and to the right and pushing equilibrium real GDP back to its​ long-run potential value. 1) A monetary policy action that could eliminate a recessionary gap in the short run is ___. 2) If Fed implements the short run monetary policy option instead of simply waiting for the long​ -run adjustments to take​ place, then it A. harms the society by lowering unemployment. B. benefits the society by lowering inflationary pressures. C. benefits the society as unemployment is reduced quickly. D. harms the society by interfering with the​ economy's natural process.

1) a decrease in the required reserve ratio 2) C. benefits the society as unemployment is reduced quickly.

Suppose that each 0.1 percentage point decrease in the equilibrium interest rate induces a​ $10 billion increase in real planned investment spending by businesses. In​ addition, the autonomous spending multiplier is 3 and the money multiplier is equal to 2. ​Furthermore, every​ $20 billion increase in the money supply brings about a 0.1 percentage point reduction in the equilibrium interest rate. 1. How much must real planned investment increase if the Fed desires to bring about a ​$400 billion increase in real​ GDP? ​$___billion. (Round your answer to a whole​ number.) 2. What dollar amount of open market operations must the Fed undertake to bring about the money supply change necessary to bring about a ​$400 billion increase in real​ GDP? ​$___billion. ​(Round your answer to a whole​ number.)

1. 133 billion (400 / 3 = 133.33 round to 133) 2. 133 billion (20 x 0.1 = 2; 2 x 133 = 266; 266 / 2 money multiplier = 133)

Suppose that each 0.1 percentage point decrease in the equilibrium interest rate induces a​ $10 billion increase in real planned investment spending by businesses. In​ addition, the autonomous spending multiplier is 5 and the money multiplier is equal to 4. ​Furthermore, every​ $20 billion increase in the money supply brings about a 0.1 percentage point reduction in the equilibrium interest rate. 1. How much must real planned investment increase if the Fed desires to bring about a ​$300 billion increase in real​ GDP? A. $75 billion. B. $60 billion. C. ​$1,500 billion. D. ​$300 billion. 2. What dollar amount of open market operations must the Fed undertake to bring about the money supply change you calculated in the previous​ question? A. ​$30 billion. B. ​$75 billion. C. ​$120 billion. D. ​$300 billion.

1. B. $60 billion. (300 / 5 = 60) 2. A. ​$30 billion. (60 billion investment; 20 x 0.1 = 2 x 60 = 120 billion increase in money supply is needed. Now apply the money multiplier (4) such that: Change in open market operations = (change in the money supply 120 / 4 money multiplier = 30)

What dollar amount of open market operations must the fed undertake to bring about the supply change necessary to bring about a $100 billion increase in real GDP?

100/ spending MULTIPLER # times the # of increased investment money dived by the money multiplier. example 100/3 x 2 = 66/5 = 13.2

Consider the following data. The money supply is ​$1 trillion, the price level equals 3, the real GDP is ​$6 trillion in​ base-year dollars. Calculate the income velocity of money.___. ​(Enter your response rounded to the nearest whole​ number.)

18 (price level 3 x 6 the real GDP = 18)

Assume that each​ $1 billion in investment in capital goods generates 0.4 percentage point of the average percentage rate of growth of per capita real​ GDP, given the​ nation's labor resources. Firms have been investing exactly ​$6 billion in capital goods each​ year, so the annual average rate of growth of per capita real GDP has been 2.4 percent. Now a government that fails to consistently adhere to the rule of law has come to​ power, and firms must make​ $100 million in bribe payments to gain official approval for every​ $1 billion in investment in capital goods. In​ response, companies cut back their total investment spending to ​$5 billions per year. If other things are equal and companies maintain this rate of​ investment, calculate the​ nation's new average annual rate of growth of per capita real GDP.___ percent. ​ (Enter your response as a percentage rounded to one decimal​ place.)

2 percent.

If real GDP is 2.0 trillion, the money supply is $500 billion, and the price level is 2.00, we know the velocity is

2.0 x 2.0 / 0.5 = 8

If real GDP is 2.5 trillion, the money supply is $400 billion, and the price level is 2.00, we know the velocity is

2.00 x 2.5 /0.4 = 12.5

A​ country's real GDP is growing at an annual rate of 2.5 percent, and the current rate of growth of per capita real GDP is 0.2 percent. Calculate the population growth rate in this nation. ___ percent. ​(Enter your response as a percentage rounded to one decimal​ place.)

2.3 percent (2.5 - 0.2 = 2.3)

Suppose that each​ 0.1-percentage-point increase in the equilibrium interest rate induces a ​$4 billion decrease in real planned investment spending by businesses. In​ addition, the investment multiplier is equal to 4​, and the money multiplier is equal to 5. ​Furthermore, every ​$10 billion decrease in the money supply brings about a​ 0.1-percentage-point increase in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal. Calculate by how much the real planned investment must decrease if the Federal Reserve desires to bring about an ​$100 billion decrease in equilibrium real GDP. ​$___billion. ​(Enter your response rounded to one decimal​ place.) Calculate by how much must the money supply decrease for the Fed to induce the change in real planned investment to bring about an ​$100 billion decrease in equilibrium real GDP. ​$___billion. ​(Enter your response rounded to one decimal​ place.) Calculate the dollar amount of open market operations that the Fed must undertake to bring about the money supply decrease required for an ​$100 billion decrease in equilibrium real GDP. ​$___billion. ​(Enter your response rounded to one decimal​ place.)

25 billion. (100 / 4 = 25) 62.5 billion ( 10bn decrease / 4bn decrease = 2.50; 25bn / 1 x 2.50 = 62.5) 12.5 ( 25 / 2 = 12.5)

Suppose that to finance its credit​ policy, the Fed pays an annual interest rate of 0.25 percent on bank reserves. During the course of the current​ year, banks hold ​$1.4 trillion in reserves. What is the total amount of interest the Fed pays banks during the​ year? The Fed pays banks ​$___billion of interest during the year. ​(Enter your response rounded to two decimal​ places.)

3.5 ----------------- ​$1.4 x 0.25/100 =0.0035 (round 2 decimal for 3.5 billion).

In an​ economy, the growth rate of GDP is known to be 4%, the growth rate of the money supply is 8​%, and the velocity of money is constant. According to the quantity theory of money and​ prices, in this​ economy, the inflation rate must be ___​%.

4%

How much must real planned investment increase if the fed desires to bring about $400 billion increase in real GDP? What dollar amount of open market operations must the fed undertake to bring about the money supply change you calculated in the previous question?

400/ 5 = 80... 80 billion. 400/5 = 80 80 * 2 = 160 160/4= 40 40 billion.

Suppose that initially the money supply is ​$4 ​trillion, the price level equals 4​, the real GDP is ​$6 trillion in​ base-year dollars and income velocity of money is 6. Then suppose that the quantity of money in circulation remain fixed but the income velocity of money doubles. If real GDP remains at its​ long-run potential​ level, calculate the equilibrium price level. ___.

8 (price is 4, thus doubles) ---------- This problem shows the relationship between the quantity of money in circulation and the price level through the equation of exchange. MsV = PY​ where Ms is the quantity of money in​ circulation, P is the equilibrium price​ level, Y is the real GDP and V is the income velocity of money. In this​ case, Ms remains ​fixed, and Y remains at its​ long-run potential​ level, but the income velocity of money is doubled.​ Thus, the price level P will double as well.

A personal bond sells for $1000 and will pay $99 a year forever. The fed changes its policy and the interest rate changes to 8 percent. The price of the bond is now $ ______

99/0.08 = $ 1237.5

Philips curve

A curve showing the relationship between unemployment and changes in wages or prices. It was long thought to reflect a trade-off between unemployment and inflation.

The indirect effect of an increase in the money supply works through

A decrease in the interest rate increasing investment and consumption.

If there is an recessionary gap in the short run, the federal reserve can eliminate the gap in the short run by undertaking a policy action that raises aggregate demand. But, if federal reserve chooses not to close the gap in the short run, the economy will eventually get back to full employment in the long run. Because when there is an inflationary gap in the short run, then in the long run a new EW will arise as input prices and expectations adjust downward causing the aggregate supply to shift upward and to the left and pushing EQ real GDP back to its long-run potential value. a. A monetary policy action that could eliminate an inflationary gap in the short run is ____________ b. If Fed implements the short run monetary policy option instead of simply waiting for the long-run adjustments to take place, then it _______

A decrease in the required reserve ratio Benefits the society as unemployment is reduced quickly.

What type of relationship exists between the growth of the money supply and changes in the inflation rate?

A direct relationship.

FOMC Directive

A document that summarizes the Federal Open Market Committee's general policy strategy, establishes near-term objectives for the federal funds rate, and specifies target ranges for money supply growth.

World Bank

A multinational agency that specializes in making loans to about 100 developing nations in an effort to promote their long-term development and growth.

International Monetary Fund (IMF)

A multinational organization that aims to promote world economic growth through more financial stability.

Quota subscription

A nation's account with the International Monetary Fund, denominated in special drawing rights.

Federal funds market

A private market (made up mostly of banks) in which banks can borrow reserves from other banks that want to lend them. Federal funds are usually lent for overnight use.

Stagflation

A situation characterized by lower real GDP, lower employment, and a higher unemployment rate during the same period that the rate of inflation increases.

Rational expectations hypothesis

A theory stating that people combine the effects of past policy changes on important economic variables with their own judgment about the future effects of current and future policy changes.

Assume that the following conditions exist. a. All banks are fully loaned​ up-there are no excess​ reserves, and desired excess reserves are always zero. b. The money multiplier is 3. c. The planned investment schedule is such that at a 6 percent rate of​ interest, investment is ​$1200 ​billion; at 5​ percent, investment is ​$1230 billion. d. The investment multiplier is 3. e. The initial equilibrium level of real GDP is ​$11.00 trillion. f. The equilibrium rate of interest is 6 percent. Now the Fed engages in expansionary monetary policy. It buys ​$1 billion worth of​ bonds, which increases the money​ supply, which in turn lowers the market rate of interest by 1 percentage point. A) Calculate the increase in money​ supply: ​$___billion. B) Calculate the increase in real​ GDP: ​$___billion. C) Calculate the new equilibrium real​ GDP: ​$___trillion. (Round your answer to two decimal​ places.)

A) 3 billion. ($1 billion worth of bonds x 3 money multiplier = 3) B) 90 billion. (1230 -1200 = 30 billion increase investment x 3 investment multiplier = 90). C) 11.09 trillion. (initial equilibrium level of real GDP $11.00 trillion + 90 billion the increase in real GDP = 11.09) Hint*** use google calculator

Which of the following events would not be likely to change​ long-run aggregate​ supply, creating a real business​ cycle? A. A reduction in consumer spending due to pessimism about economic conditions. B. A decrease in the labor force participation rate. C. An improvement in technology that increases productivity. D. An increase in oil prices that is expected to be permanent. E. All of the above events would change​ long-run aggregate supply.

A. A reduction in consumer spending due to pessimism about economic conditions.

Which of the following is an argument in favor of passive ​policymaking? A. Aggregate demand shocks have little effect in the short run and no effect on real GDP in the long run. B. Prices are usually sticky due to menu costs and thus do not adjust in the short run. C. Pure competition is not typical in most markets. D. The Phillips curve relationship is stable in the short run and predictable in the long run.

A. Aggregate demand shocks have little effect in the short run and no effect on real GDP in the long run.

According to the Keynesian​ approach, a decrease in the money supply increases real GDP by lowering interest​ rates, which increases investment. A. False B. True

A. False

For any​ nation, an increased rate of population growth always adds to the rate of economic growth. A. False B. True If real GDP grows at a constant rate of 6 percent per year and the annual rate of population growth increases from 5 percent to 8​ percent, the annual rate of growth per capita GDP will A. not change. B. decline from 6 percent to 3 percent. C. increase from 11 percent to 14 percent. D. decline from 1 percent to -2 percent.

A. False D. decline from 1 percent to -2 percent.

Which of the following statements is false about the effects of population growth on economic​ growth? A. Increased population growth will lead to an increase in economic growth because it will be able to make use of dead capital. B. For a given growth rate of real​ GDP, a higher rate of population tends to reduce growth of per capita real GDP. C. If an increase in population leads to a higher rate of labor force​ participation, the growth rate can increase. D. Increased population growth can have contradictory effects on economic growth.

A. Increased population growth will lead to an increase in economic growth because it will be able to make use of dead capital.

Suppose that the Fed pursues an expansionary monetary policy. Which of the following statements best explains the transmission mechanism in an open​ economy? A. The decrease in interest rates will cause capital outflow comma lowering the value of the dollar and increasing net exports. B. The increase in interest rates will cause capital outflow comma increasing the value of the dollar and increasing net exports. C. The decrease in interest rates will cause capital inflow comma lowering the value of the dollar and decreasing net exports. D. The increase in interest rates will cause capital inflow comma increasing the value of the dollar and decreasing net exports.

A. The decrease in interest rates will cause capital outflow comma lowering the value of the dollar and increasing net exports.

Many traditional Keynesians argue that fighting recession with monetary policy is likely to be relatively ineffective. A. True B. False

A. True

According to Keynesian​ theory, it would take​ _______ decrease in the interest rate to increase investment to the desired level to eliminate the recessionary gap. A. a large B. a small C. a proportionate D. a​ 100%

A. a large (In order to achieve a large enough decrease in the interest rate it would take an enormous change in the money supply.)

Dead capital is defined as A. any capital resource that lacks clear title of ownership. B. any capital resource that has no labor resources used with it. C. any capital resource that is not utilized efficiently. D. any capital resource that is obsolete.

A. any capital resource that lacks clear title of ownership.

Increases in output and increases in the inflation rate have been linked to A. increases in the money supply. B. discretionary government spending. C. higher rates of interest. D. discretionary tax policy.

A. increases in the money supply.

When firms get​ investors' money and use it in riskier projects than the investors anticipated there is A. moral hazard. B. adverse selection. C. dead capital. D. an international financial crisis.

A. moral hazard.

Normally, when aggregate demand​ increases, firms find it more profitable to raise prices than to leave prices unchanged. The idea behind the​ small-menu-cost explanation for price stickiness is that firms will leave their prices unchanged if their profit gain from adjusting prices is less than menu costs they would incur if they change prices. If firms anticipate that a rise in demand is likely to last for a long​ time, then they will be A. more likely to increase their prices since their future profits will be higher than the​ small, one-time menu cost. B. less likely to increase their production since their future profits will be lower than the menu cost. C. more likely to increase their production since their future profits will be higher than the menu cost. D. less likely to increase their prices since their future profits will be lower than the​ small, one-time menu cost.

A. more likely to increase their prices since their future profits will be higher than the​ small, one-time menu cost. (Normally, when aggregate demand​ increases, firms find it more profitable to raise prices than to leave prices unchanged. The idea behind the​ small-menu-cost explanation for price stickiness is that firms will leave their prices unchanged if their profit gain from adjusting prices is less than menu costs they would incur if they change prices. If firms anticipate that a rise in demand is likely to last for a long​ time, then they will be more likely to increase their prices since their future profits will be higher than the​ small, one-time menu cost.)

​"Rational expectations" means that A. people base their expectations on all readily available past and current information. B. people correctly anticipate all changes in the economy. C. people base their expectations only on what has happened in the past. D. people make systematic errors in forming expectations about the economy.

A. people base their expectations on all readily available past and current information.

Many economists believe that the growth of the money supply is A. positively related to the growth of real GDP. B. not related to output growth. C. directly related to interest rate growth. D. inversely related to the price level.

A. positively related to the growth of real GDP.

The natural rate of unemployment depends on factors that affect the behavior of both workers and firms. All the following are likely to influence the natural rate of​ unemployment, except A. the burden of government debt on the general public. B. the training and skill level of the workers. C. the access to information and the degree of competition in product markets. D. the extent of government taxation and regulation on the firms.

A. the burden of government debt on the general public. -------------------------------------------------- The natural rate of unemployment depends on factors that affect the behavior of both workers and firms. All the following are likely to influence the natural rate of unemployment except the burden of government debt on the general public.

Suppose you go shopping for a gift for a friend and also find a sweater that you want for yourself. You pay cash for the gift and write a check for the sweater. Your purchases are made with money holdings represented by A. the transaction demand for money because you planned to buy the gift and the precautionary demand for money because you did not anticipate buying the sweater. B. the transaction demand for money because you paid for the gift with cash. C. your supply of money to the economy. D. the asset demand for money because you used money for both purchases.

A. the transaction demand for money because you planned to buy the gift and the precautionary demand for money because you did not anticipate buying the sweater.

The aim of the World Bank is A. to make loans to developing nations to promote growth and development. B. to provide short minus term credit based on member currency quotas. C. to reduce asymmetric information to lenders and investors. D. to promote world economic growth through financial stability.

A. to make loans to developing nations to promote growth and development.

Holding money as a medium of exchange to make payments is known as A. transactions demand. B. asset demand. C. aggregate demand. D. precautionary demand.

A. transactions demand.

The Phillips curve shows​ that, in the​ short-run: A. unexpected changes in aggregate demand produce an inverse relationship between inflation and unemployment. B. expected changes in aggregate demand produce a positive relationship between inflation and unemployment. C. unexpected changes in aggregate demand produce a positive relationship between inflation and unemployment. D. expected changes in aggregate demand produce an inverse relationship between inflation and unemployment.

A. unexpected changes in aggregate demand produce an inverse relationship between inflation and unemployment.

In the figure at right, if the economy is at EQ at E1, the FED would most likely

Adopt an expansionary monetary policy

Suppose that the economy currently is in long-run EQ. Explain the short- and long - run adjustments that will take place in an aggregate demand-aggregate supply diagram if the fed expands the quantity of money in circulation.

Aggregate demand curve shifts to the right; in the short-run both price level and real GDP increase. Over the long run the short-run aggregate supply curve shifts upward to the left and a new long-run EQ is reached at the initial EQ GDP but at higher price level.

Active (discretionary) policymaking

All actions on the part of monetary and fiscal policymakers that are undertaken in response to or in anticipation of some change in the overall economy.

Taylor rule

An equation that specifies a federal funds rate target based on an estimated long-run real interest rate, the current deviation of the actual inflation rate from the Federal Reserve's inflation objective, and the gap between actual real GDP per year and a measure of potential real GDP per year.

Trading Desk

An office at the Federal Reserve Bank of New York charged with implementing monetary policy strategies developed by the Federal Open Market Committee.

Dead capital

Any capital resource that lacks clear title of ownership.

Since the financial meltdown of the late 2000s the Fed has launched a credit policy which consists of

Auctioning funds to banking institutions Purchasing some of the debts of auto finance companies. Providing short-term emergency financing arrangements for nonfinancial firms.

Read through the descriptions below to correctly match the action and the type of policy undertaken. A. Active policy​ making: Unemployment compensation paid out by the​ government; Passive policy​ making: Fed buying U.S. government securities in response to a recession. B. Active policy​ making: Fed buying U.S. government securities in response to a​ recession; Passive policy​ making: Unemployment compensation paid out by the government. C. Active policy​ making: Fed buying U.S. government securities in response to a​ recession; Passive policy​ making: Congress increasing government spending. D. Active policy​ making: The U.S. progressive tax​ system; Passive policy​ making: A decrease in the marginal tax rates approved by Congress and the President.

B. Active policy​ making: Fed buying U.S. government securities in response to a​ recession; Passive policy​ making: Unemployment compensation paid out by the government.

Which of the following is an argument in favor of active policymaking? A. The Phillips curve relationship varies with inflation expectations and is nonexistent in the long run. B. Aggregate demand shocks lead to changes in real GDP in the short run and possibly in the long run. C. Prices are usually flexible because firms react immediately to demand changes. D. Aggregate supply shocks cause movements in real GDP and explain most business cycles.

B. Aggregate demand shocks lead to changes in real GDP in the short run and possibly in the long run.

Which of the following arguments is used in support of undertaking passive​ policymaking? A. Pure competition is not typical in most markets as imperfect competition dominates the economy. B. Aggregate demand shocks play little or no role in the economy in the short run. C. Wage flexibility is uncommon because of efficiency wages. D. The Phillips curve varies with inflation expectations.

B. Aggregate demand shocks play little or no role in the economy in the short run.

How does the International Monetary Fund determine a​ nation's quota​ subscription? A. By special drawing rights. B. By the​ country's national income. C. By the amount of dead capital in the country. D. By vote of existing members.

B. By the​ country's national income.

Political freedom is generally considered to be more important than economic freedom in determining economic growth. A. True B. False

B. False

Suppose that​ currently, the economy is underutilizing its resources. Which of the following correctly describes what type of monetary policy the Fed might choose and how the policy would change the​ economy? A. The Fed could use a contractionary monetary policy to reduce short minus run aggregate supply and GDP. B. The Fed could use an expansionary monetary policy to increase aggregate demand and GDP. C. The Fed could use a contractionary monetary policy to reduce aggregate demand and GDP. D. The Fed could use an expansionary monetary policy to increase short minus run aggregate supply and GDP.

B. The Fed could use an expansionary monetary policy to increase aggregate demand and GDP.

Which of the following events would be likely to increase the supply of​ money? A. Banks perceive loans to be more risky and wish to hold more excess reserves. B. The Fed decreases the discount rate relative to the federal funds rate. C. The Fed conducts an open market sale of bonds. D. The Fed increases reserve requirements for banks.

B. The Fed decreases the discount rate relative to the federal funds rate.

What does research indicate about the role of political freedom in determining economic​ growth? A. Countries that grant full political freedom experience positive rates of economic growth. B. The extent of political freedom does not necessarily increase the rate of economic growth. C. Political freedom is much more important in increasing economic growth than economic freedom. D. Increasing the amount of political freedom increases the amount of dead capital that will reduce growth rates.

B. The extent of political freedom does not necessarily increase the rate of economic growth.

Which of the following is a key function of the International Monetary​ Fund? A. To make loans to governments that have been successful in obtaining private investments. B. To stabilize international financial flows. C. To encourage the use of dead capital. D. To finance capital investments in countries that have trouble attracting funds from private investors.

B. To stabilize international financial flows.

According to the Keynesian​ approach, an increase in the money supply increases real GDP by lowering interest​ rates, which increases investment. A. False B. True

B. True

All of the countries that grant considerable economic freedom have experienced positive rates of economic growth. A. False B. True

B. True

Dead capital is usually found in A. developed countries. B. developing countries. C. large corporations. D. small countries.

B. developing countries.

The difference between economic and political freedom is that A. economic freedom allows for only public ownership of resources with the ability to exchange them while political freedom implies no government interference in the market place. B. economic freedom allows for the private ownership of resources with the ability to exchange​ them, while political freedom allows citizens to democratically select the​ nation's leaders. C. economic freedom allows for the private ownership of resources with the ability to exchange​ them, while political freedom implies no government interference in the market place. D. economic freedom allows for the private ownership of resources with the ability to exchange​ them, while political freedom implies that the government can own property and exchange it in the market system too.

B. economic freedom allows for the private ownership of resources with the ability to exchange​ them, while political freedom allows citizens to democratically select the​ nation's leaders.

When dead capital exists A. there is an environmental hazard created. B. it cannot be allocated to its most efficient use. C. it prohibits more technologically advanced capital from being used because the dead capital has totally depreciated. D. firms will try to sell it to get rid of it.

B. it cannot be allocated to its most efficient use.

According to the real business cycle theory A. investment spending by business is the only factor that affects changes in real GDP or unemployment. B. only​ supply-side factors matter in influencing unemployment. C. unemployment is fixed at the natural rate and cannot be affected by anything the government does. D. only​ demand-side factors matter in influencing unemployment.

B. only​ supply-side factors matter in influencing unemployment.

In order to induce private banks to maintain substantial reserve deposits with the Federal Reserve​ banks, since 2008 the Fed has A. raised the legal reserve ratio that the banks have to maintain. B. paid banks an interest rate that is higher than the federal funds rate on their reserves. C. paid banks an interest rate that is lower than the federal funds rate. D. paid banks an interest rate that is equal to the federal funds rate.

B. paid banks an interest rate that is higher than the federal funds rate on their reserves.

The type of policy making that is not in response to actual or potential changes in overall economic activity is called A. discriminatory policy making. B. passive policy making. C. active policy making. D. discretionary policy making.

B. passive policy making.

Economists have not reached agreement on how lengthy the time horizon for​ "the long​ run" is in the context of Phillips curve analysis. Because of the advent of more sophisticated computer and communications​ technology, the time horizon that defines the​ "long-run" is likely to be A. extended as it provides immediate access to information. B. shortened as it provides immediate access to information. C. not affected because of the existence of rational expectation. D. either shorter or longer depending on the business cycles.

B. shortened as it provides immediate access to information.

When Alan Greenspan was nominated for his third term as chair of the Federal​ Reserve's Board of​ Governors, a few senators held up his confirmation. One of them explained their joint action to hinder his confirmation by​ saying, "Every time growth starts to go​ up, they​ [the Federal​ Reserve] push on the​ brakes, robbing working families and businesses of the benefits of faster​ growth." This statement is based on A. the adaptive expectations theory. B. the​ trade-off as shown by the​ short-run Phillips curve. C. the​ trade-off as shown by the​ long-run Phillips curve. D. the rational expectations theory.

B. the​ trade-off as shown by the​ short-run Phillips curve.

The basic problem with the existence of dead capital is that A. dead capital creates government​ inefficiency, bureaucracy, and excessive regulation. B. with no clear​ ownership, dead capital often cannot be transferred to its most efficient use. C. dead capital cannot be put to any use since there is no ownership. D. since there is no cost to dead​ capital, there is an incentive to overinvest.

B. with no clear​ ownership, dead capital often cannot be transferred to its most efficient use.

Suppose that economy is initially long-run and short-run EQ. If the FED decided to pursue a contractionary monetary policy we will see

Bond prices fall interest rates rise, aggregate demand falls as investment and consumption spending decrease, and real GDP and the price level decreasing in the short run, but only the price level decreasing in the long run.

Which of the following is a true statement?

Both the direct and indirect effects of an expansionary monetary policy are to increase aggregate demand.

As a result of monetary policy of the​ Fed, the dollar appreciated and the amount of exports decreased. Which of the following Fed policies could have caused this​ outcome? A. A decrease in the reserve requirement ratio. B. A Fed purchase of bonds from banks. C. A Fed sale of bonds to brokers and banks. D. A decrease in the discount rate.

C. A Fed sale of bonds to brokers and banks.

Which of the following is the definition of portfolio investment? A. Purchase of more than 10 % of the shares of a company in another nation. B. Providing management services or consulting advice to a company in another nation. C. Purchase of less than 10 % of the shares of ownership in a company in another nation. D. Making loans to or buying bonds from a company in another nation.

C. Purchase of less than 10 % of the shares of ownership in a company in another nation.

Which of the following is an example of the asset demand for money? A. Joan believes that gold is an excellent store of value. B. Carla keeps $ 2,000 in a bank account in case of emergencies. C. Since the stock market has been volatile lately, Jean holds most of her savings in a bank account. D. Marianne uses money in her checking account to buy groceries every week.

C. Since the stock market has been volatile lately, Jean holds most of her savings in a bank account.

How do developing countries benefit from international​ investment? A. The more private investment a country can​ attract, the greater the amount the World Bank will give the country. B. International investment leads to an increase in the amount of dead capital that leads to an increase in profits. C. There will be an increase in economic growth. D. International investment will replace local investment allowing the residents to buy more.

C. There will be an increase in economic growth.

The greatest obstacle to international investment in developing nations is usually A. government regulation of capital flows. B. lack of profitable investment opportunities. C. asymmetric information. D. labor costs

C. asymmetric information.

Decreases in the money supply affect the economy indirectly because A. interest rates decrease causing planned investment to increase​, which causes an increase in aggregate demand. B. people have insufficient money balances and thus aggregate demand decreases. C. interest rates increase, causing planned investment to decrease​, which causes a decrease in aggregate demand. D. people spend excess money balances and​ thus, aggregate demand increases. E. There is no indirect effect of the money supply on the economy.

C. interest rates increase, causing planned investment to decrease​, which causes a decrease in aggregate demand.

The demand for money A. is an upward sloping function of the interest rate. B. is positively related to the opportunity cost of holding money. C. is a downward sloping function of the interest rate. D. None of the above.

C. is a downward sloping function of the interest rate.

Population growth is not likely to increase economic growth when A. new immigrants are highly skilled workers. B. the country has some economic or political freedom. C. labor participation rates do not increase with population growth. D. population growth occurs through immigration rather than higher birthrates.

C. labor participation rates do not increase with population growth.

Suppose that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy​ instruments, then the Fed will engage in A. open market​ sales, decreasing the reserve​ requirement, and increasing the discount rate. B. open market​ purchase, increasing the reserve​ requirement, and decreasing the discount rate. C. open market​ sales, increasing the reserve​ requirement, and increasing the discount rate. D. open market​ purchase, increasing the reserve​ requirement, and increasing the discount rate.

C. open market​ sales, increasing the reserve​ requirement, and increasing the discount rate.

Suppose people expect the inflation rate to be 3 percent. The government engages in a​ one-time expansionary monetary policy in order to lower unemployment. Once people realize what has happened A. the Phillips curve will shift​ inward, causing unemployment to return to its natural rate. B. there will be a movement along the Phillips​ curve, causing the inflation rate to return to 3 percent. C. there will be a movement down along the Phillips​ curve, causing unemployment to return to its original level. D. the Phillips curve will shift​ outward, causing unemployment to return to its natural rate.

C. there will be a movement down along the Phillips​ curve, causing unemployment to return to its original level.

The main argument against using active policymaking is that A. foreign economies can easily counter the policy undertaken by the U.S. government or Fed. B. the Fed may offset fiscal policy. C. time lags make it very difficult to judge when the policy will have an effect. D. passive policymaking is destabilizing.

C. time lags make it very difficult to judge when the policy will have an effect.

The aim of the International Monetary Fund (IMF) is A. to make loans to developing nations to promote growth and development. B. to reduce world poverty. C. to promote world economic growth through financial stability. D. to reduce asymmetric information to lenders and investors.

C. to promote world economic growth through financial stability.

Real business cycle theory assumes that A. prices are sticky downward. B. the LRAS curve remains stationary. C. wages and prices are perfectly flexible. D. unemployment always is equivalent to the natural rate of unemployment.

C. wages and prices are perfectly flexible.

The linkage of the interest rate based transmission mechanism of monetary policy are summarized as follows:

Change in the money supply>change in interest rates>change in planned investment>change in aggregate demand.

Small menu costs

Costs that deter firms from changing prices in response to demand changes-for example, the costs of renegotiating contracts or printing new price lists.

An increase in the money supply will...

Create direct effect of an increase in consumption due to higher money balances. create an indirect effect of increased consumption and investment through increased saving and loans. increase the price level.

During an interval between 2010 and 2011 the federal reserve embarked on a policy it termed "quantitative easing" Total reserves in the banking system increased. Hence, the federal reserves liabilities to banks increased and at the same time its assets rose as it purchased more assets - many of which were securities with private markets values that had dropped considerably. The money multiplier declined, so the net increase in the money supply was negligible. Indeed, during a portion of the period, the money supply actually declined before rising near its previous value. The Feds quantitative easing can be best described as a

Credit policy action.

As a result of monetary policy of the​ Fed, the dollar appreciated and the amount of exports decreased. Which of the following Fed policies could have caused this​ outcome? A. A Fed purchase of bonds from banks. B. A decrease in the discount rate. C. A decrease in the reserve requirement ratio. D. A Fed sale of bonds to brokers and banks.

D. A Fed sale of bonds to brokers and banks.

Which of the following are failures of the real business cycle​ theory? A. It cannot explain all facets of the business cycle. B. It cannot explain the Great Depression. C. It fails to explain the rigidity of wages and prices in the economy. D. All of the above are failures of the real business cycle theory. E. None of the above are​ failures, as the real business cycle model addresses all these issues.

D. All of the above are failures of the real business cycle theory.

According to the rational expectations​ hypothesis, a policy cannot have a​ long-run effect on real GDP or the unemployment rate because A. people do not persistently make the same mistakes in forecasting the future. B. in the long​ run, people's expectations will correctly anticipate the effects of any policy action and the public will react in such a way as to nullify the impact of policy. C. the policy will not contain unsystematic qualities in the long run and thus the public will be able to accurately forecast the actions and consequences of policy makers. D. All of the above. E. A and C only.

D. All of the above.

The efficiency wage theory states that A. under highly competitive​ atmosphere, there will be an optimal wage that a firm would be paying regardless of large fluctuations in the demand for its output. B. wages may not fall in recessionary​ times, but it does not explain why prices remain rigid. C. a higher real wage encourages workers to work​ harder, improve their​ efficiency, increase morale and raise their loyalty to the firm. D. All of the above.

D. All of the above.

The​ Fed's credit policy since 2008 has A. led to an expansion of asymmetric information problems by reducing​ banks' incentive to screen and monitor borrowers. B. provided banks more liquidity. C. given private banks more time to recover from the financial crisis. D. All of the above.

D. All of the above.

Suppose that the economy is currently in​ long-run equilibrium. Which of the following would be likely to cause a​ short-run decrease in the unemployment rate relative to the natural​ rate? A. A contractionary fiscal policy that was not fully anticipated B. A permanent decrease in the minimum wage C. An increase in union membership D. An expansionary monetary policy that was not fully anticipated

D. An expansionary monetary policy that was not fully anticipated

Which of the following statements is correct when considering the choice between active and passive policy​ making? A. Economists believing that markets are stable and efficient support contractionary policy​ making; economists that believe that there are rigidities in markets support expansionary policy making. B. Economists believing that markets are stable and efficient support monetary​ policy; economists that believe that there are rigidities in markets support fiscal policy. C. Economists believing that markets are stable and efficient support active policy​ making; economists that believe that there are rigidities in markets support passive policy making. D. Economists believing that markets are stable and efficient support passive policy​ making; economists that believe that there are rigidities in markets support active policy making.

D. Economists believing that markets are stable and efficient support passive policy​ making; economists that believe that there are rigidities in markets support active policy making.

Which of the following is not a reason people choose to hold money​ balances? A. Reduced risk compared to other assets. B. Liquidity. C. Having cash to pay for unplanned expenditures and emergencies. D. Money holdings are good assets during periods of inflation.

D. Money holdings are good assets during periods of inflation.

Which of the following statements about the policy irrelevance proposition is not​ true? A. The policy irrelevance proposition is associated with the natural rate of unemployment. B. The policy irrelevance proposition implies that any anticipated policy will have no effect on the level of real GDP. C. The policy irrelevance proposition assumes that people​ don't make the same mistakes in forecasting the future. D. The policy irrelevance proposition implies that the there is a short run change in real​ GDP, but no long run change in real GDP.

D. The policy irrelevance proposition implies that the there is a short run change in real​ GDP, but no long run change in real GDP.

People called​ "Fed watchers" earn their living by trying to forecast what policies the Federal Reserve will implement within the next few weeks and months. Suppose that Fed watchers discover that the current group of Fed officials is following very systematic and predictable policies intended to reduce the unemployment rate. The Fed watchers then sell this information to​ firms, unions, and others in the private sector. If pure competition​ prevails, prices and wages are​ flexible, and people form rational​ expectations, then the​ Fed's policies A. are likely to have their intended effects on the unemployment rate. B. are likely to have a measurable effect on both unemployment and inflation rates. C. may or may not have an effect on the unemployment rate. D. are likely to have no effect on the unemployment rate.

D. are likely to have no effect on the unemployment rate. ---------------------------- If Fed officials are following policies intended to reduce the unemployment rate and if pure competition​ prevails, prices and wages are​ flexible, and people form rational​ expectations, then real GDP will not​ change, so the actual unemployment rate will remain unaltered.​ Thus, the​ Fed's policies will have no effect on the unemployment rate.

Consider the following​ statement: "In an important​ sense, the term policy irrelevance proposition is misleading because even if the rational expectations hypothesis is​ valid, economic policy actions can have significant effects on real GDP and the unemployment​ rate." This statement is A. incorrect because fully anticipated government policy can influence real GDP and the rate of unemployment. B. correct because all government policies can always influence real GDP and the rate of unemployment. C. incorrect because government policy can no longer influence real GDP and the rate of unemployment. D. correct because unanticipated government policy can influence real GDP and the rate of unemployment.

D. correct because unanticipated government policy can influence real GDP and the rate of unemployment. ---------------------------- This statement is correct because unanticipated government policy can influence real GDP and the rate of unemployment.

The policy irrelevance proposition states that A. if expectations are not​ rational, monetary policy cannot have an impact on the economy. B. only anticipated monetary policy changes can affect real GDP or the unemployment rate. C. if expectations are​ rational, monetary policy cannot have an impact on the economy. D. only unanticipated monetary policy changes can affect real GDP or the unemployment rate.

D. only unanticipated monetary policy changes can affect real GDP or the unemployment rate.

If prices are sticky in the short​ run, a decrease in aggregate demand will lead to A. a small decrease in real GDP. B. either an increase or a decrease in real​ GDP, depending on whether expectations are rational. C. no change in real GDP. D. the largest possible decrease in real GDP. Because of the effect of sticky prices on real GDP in the short​ run, new Keynesian economists advocate _____ policymaking.

D. the largest possible decrease in real GDP. ---------- active

An international financial crisis occurs when A. a​ nation's government prints too much money and creates hyperinflation. B. the value of the U.S. dollar falls. C. there is not enough investment to finance new projects in developing countries. D. there is a rapid withdrawal of foreign investments and loans from a nation.

D. there is a rapid withdrawal of foreign investments and loans from a nation.

If the Fed decreases the discount​ rate, relative to the federal funds​ rate, then this A. would increase the cost of funds for institutions borrowing from the Fed. B. would cause the money supply to decrease. C. would cause the required reserve ratio to increase. D. would decrease the cost of funds for institutions borrowing from the Fed.

D. would decrease the cost of funds for institutions borrowing from the Fed.

The new Keynesian​ model, using the theories of sticky prices and efficiency​ wages, suggests that the A. the aggregate demand curve is downward sloping. B. ​long-run aggregate supply is vertical. C. ​short-run aggregate supply curve has a steep positive slope. D. ​short-run aggregate supply curve is horizontal.

D. ​short-run aggregate supply curve is horizontal.

Cyclical unemployment

Deviations of the actual unemployment rate from the natural rate.

If expectations are​ rational, an unanticipated increase in aggregate demand will cause​ ____________. A fully anticipated increase in aggregate demand will cause​ ______________. A. an increase in the price level but no change in real​ GDP; an increase in both the price level and real GDP. B. a decrease in both the price level and real​ GDP; a decrease in the price level but no change in real GDP. C. an increase in both the price level and real​ GDP; no change in either the price level or real GDP. D. a decrease in the price level but no change in real​ GDP; a decrease in both the price level and real GDP. E. an increase in both the price level and real​ GDP; an increase in the price level but no change in real GDP.

E. an increase in both the price level and real​ GDP; an increase in the price level but no change in real GDP.

Quantitative easing

Federal Reserve open market purchases intended to generate an increase in bank reserves at a nearly zero interest rate.

Credit policy

Federal Reserve policymaking involving direct lending to financial and nonfinancial firms.

Suppose that the economy is depicted as shown to the right a. The state of the economy depicted at the right can be best described as

Having a recessionary gap Short-rune Real GDP falls short of the long-run aggregate supply curve.

Suppose that the economy is depicted at the right. a. State of the economy depicted at the right can be best described as

Having an inflationary gap.

Transactions demand

Holding money as a medium of exchange to make payments. The level varies directly with nominal GDP.

Asset demand

Holding money as a store of value instead of other assets such as corporate bonds and stocks.

Precautionary demand

Holding money to meet unplanned expenditures and emergencies.

New Keynesian inflation dynamics

In new Keynesian theory, the pattern of inflation exhibited by an economy with growing aggregate demand--initial sluggish adjustment of the price level in response to increased aggregate demand followed by higher inflation later.

Assume (other things constant) that the fed increases he money supply. The mechanism through which aggregate demand increases is according to interest rate based transmission mechanism, summarized as follows:

Increase in money supply> decrease in interest rates>increase in planned investment spending> increase in aggregate demand.

To implement a credit policy intended to expand liquidity of the banking system, the fed desires to increase its assets by lending to a substantial number of banks. How might the Fed adjust the interest rate that it pays banks on reserves in order to induce them to hold the reserves required for funding this credit policy action?

Increase the interest rate.

The decision to buy or sell bonds is

Independent of bond prices.

Increases in the money supply affect the economy indirectly because

Interest rates decrease, causing planned investment to increase, which causes an increase in aggregate demand.

The equation of exchange

Is an accounting identity and is always correct. states that the money supply times velocity equals nominal national income. states that expenditures by some people equal income received by others.

According to the equation of exchange, if velocity is constant and output is fixed at the full employment level, then any percentage increase in the money supply will.

Lead to an equal percentage increase in the price level. In this situation there is a direct transmission of an increase in the money supply to the price level.

According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply will

Lead to an increase in investment spending and an increase in real GDP which is greater than the increase in investment spending.

The Feds credit policy since 2008 has.

Led to a reduction in the money multiplier.

The bond market is depicted in the graph to the right.. a. The bond demand curve is downward sloping because. b. Suppose the fed decides to sell bonds. depict changes in the bond market. Properly label your line. Label the new EQ.

Lower bond prices translate into higher interest rates and returns.

Monetary economists are strong supporters of the quantity theory of money. If the growth rate of money supply is known then inflation and the rate of growth of nominal GDP according to this crude version of the quantity theory can be determined and forecasted.. Use the graph to help determine the monetary aggregate M1 or M2 monetarists will employ in order to correctly forecast inflation and or nominal GDP growth.

M2 since according to the graph income velocity based on M2 is practically constant.

Which of the following is an example of the transaction demand for money?

Marianne uses money in her checking account to buy groceries every week.

In an open economy, the next export effect

May offset an expansionary fiscal policy but enhance an expansionary monetary policy.

Suppose the actual EQ federal funds rate is below the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that

Monetary policy is expansionary.

Which of the following is not a reason people choose to hold money balances.

Money holdings are good assets during periods of inflation.

which of the follow is NOT a reason people choose to hold money balances?

Money holdings are good assets during periods of inflation.l

If the fed sells US government securities, the

Money supply decreases, and the money supply curve shifts to the left.

Suppose that initially the money supply is $4 trillion, the price level equals 4, the real GDP is $6 trillion in base-year dollars and income velocity of money is 6. Then suppose that the fed cuts the money supply in half but the income velocity of money doubles. Calculate the price level after all three changes have taken place _____

New Price level = 2.0 x 12 / 6.0 = 4

In the above figure, suppose the economy is in short - run eq at point D. Which of the following is the best policy option for the fed?

Open market purchase of government securities

Price of a bond =

Periodic return / interest rate.

Passive (nondiscretionary) policymaking

Policymaking that is carried out in response to a rule. It is therefore not in response to an actual or potential change in overall economic activity.

Assuming that the fed inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments. It sells bonds in the open market, increases the discount rate , and increases the reserve ratio. The next export effect resulting from these monetary policy actions will _________.

Raise the interest rate, increase the inflows of international capital, increase the value of the dollar, decrease exports, and as a consequence real QDP will decline even further.

Rate of growth of per capita real GDP

Rate of growth of per capita real GDP = rate of growth in real GDP - rate of growth of population

The federal reserve finances its credit policy with

Reserve deposits that private banks hold with the fed.

If the fed wishes to contract the economy it will

Sell more bonds, taking reserves out of the banking system.

An increase in the money supply will

Shift the aggregate demand curve outward and to the right not change the long-run aggregate supply curve but ultimately will only raise the price level in long-run EQ price level Move the EQ point along the short run aggregate supply curve

Money balances

Synonymous with money, money stock, money holdings.

The federal reserve ( the fed) and the European central bank ( ECB) apply monetary policy by controlling interest rates: the federal funds rate , and the repo rate respectively. These two central banks apply expansionary policy by reducing the two interest rates and contractionary policy by raising the two target interest rates. Use the graph to help determine which of the following statements regarding the monetary policies of the fed and and the ECB are true.

The ECB followed a very passive monetary policy for a long period ( from June 2003 to December 2005 ).

Which of the following events would be likely to increase the supply of money?

The Fed decreases the discount rate relative to the federal funds rate.

The bond market is depicted in the graph to the right. a. The supply curve of bonds is drawn vertically because b. Suppose that the Fed decides to sell bonds. ​1.) Using the line drawing tool​, draw the changes in the bond market and the label the new line ​'S1​'. ​2.) Using the point drawing tool​, find and label the new equilibrium point ​'E1​'.

The Fed's decision to buy or sell bonds is independent of bond prices.

Contractionary monetary policy by the fed can be hampered by

The ability of US citizens and businesses to obtain dollars from foreign sources.

Foreign direct investment

The acquisition of more than 10 percent of the shares of ownership in a company in another nation.

Policy irrelevance proposition

The conclusion that policy actions have no real effects in the short run if the policy actions are anticipated and none in the long run event if the policy actions are unanticipated.

In the figure at right, if the economy is in EQ at E1 then

The economy is underutilizing its resources.

What will happen to the Feds liabilities if it implements the policy action to induce banks to hold the reserves required for funding its credit policy?

The feds liabilities will increase

Equation of exchange

The formula indicating that the number of monetary units (Ms) times the number of times each unit is spent on final goods and services (V) is identical to the price level (P) times real GDP (Y).

Quantity theory of money and prices

The hypothesis that changes in the money supply lead to equiproportional changes in the price level.

Federal funds rate

The interest rate that depository institutions pay to borrow reserves in the interbank federal funds market.

Discount rate

The interest rate that the Federal Reserve charges for reserves that it lends to depository institutions. It is sometimes referred to as the rediscount rate or, in Canada and England, as the bank rate.

When the fed first began its credit policy programs in 2008, the M2 measure of aggregate money balances dipped and did not grow for several months. As a result.

The nominal federal funds rate remained close to zero., the estimated real federal funds rate rose

Income velocity of money (V)

The number of times per year a dollar is spent on final goods and services; identically equal to nominal GDP divided by the money supply.

In the figure at right, if we begin at S1 and the fed sells bonds,

The price of bonds falls and the interest rates rises.

Portfolio investment

The purchase of less than 10 percent of the shares of ownership in a company in another nation.

International financial crisis

The rapid withdrawal of foreign investments and loans from a nation.

Natural rate of unemployment

The rate of unemployment that is estimated to prevail in long-run macroeconomic equilibrium when all workers and employers have fully adjusted to any changes in the economy.

Economic freedom

The rights to own private property and to exchange goods, services, and financial assets with minimal government interference.

when people want to hold money to make regular planned expenditures, this is

The transaction demand for money.

The 10-year moving average was created by finding the average growth rate over the ten years prior for example, the 1969 value of the rate of growth for M1 is the average growth rate of M1 for the years 1959 =1969, and the value of M1 for 1970 is the average rate of growth of M1 during the 1960-1970. The 10 years move average of money supply and inflation are utilized because of the strong conviction of monetarist economists that changes in money supply. Use the graph to help determine which of the following statements regarding the growth rate of M1 and inflation are true.

There exists a relationship between the growth of M1 and inflation but not a very tight one. This implies that there may be additional variables other than M1 that may affect inflation.

A member of congress, who has never has an economics course, has just been placed on a money and banking committee. The officials need a briefing prior to the first meeting covering the roles of the money supply in the economy. Which of the following statements should you insist that the official remember when entering the first committee meeting?

There is a direct, albeit loose, relationship between the growth of the money supply and the price level; and a direct relationship between the growth of the money supply and GDP growth.

Assume that the following conditions exist. a. all banks are fully loaned up- there are no excess reserves and desired excess reserves are always zero. b. the money multiplier is 4 c. the planned investment schedule is such that at a 8 percent rate of interest investment is 1200 billion at 5 percent investment is 1225 billion d. the investment multiplier is 3 e. The initial equilibrium level of real GDP is 11 trillion. f. The equilibrium rate of interest is 6 percent. Now the fed engages in expansionary monetary policy. It buys 2 billion worth of bond, which increases the money supply, which in turn lowers the market rate of interest by 1 percent point. Calculate the increase in money supply: _____ billion

Total increase in money supply = bond purchases by FED x Money multiplier = 2 x 4 = 8 billion. The increase in EQ real GDP can be calculated as follows: Increase in real GDP = increase in investment x investment multiplier= 25 x 3 = New level of GDP = initial level of GDP + increase in real GDP - 11000 + 75 = 11.08

The supply curve of bonds is

Vertical.

The Fed increase the discount rate, relative to the federal duns rate, then this

Would increase the cost of funds for institutions borrowing from the Fed. As the discount rate increases, relative to the federal funds rate, it increase the cost of barrowing form the fed.

According to the quantity theory of money and prices, a -3 % change in the money supply, holding other variables constant leads to

a -3 % change in the price level. There is a direct transmission of the change in the money supply to the rice level according to the quantity theory of money.

According to the quantity theory of money

a given proportionate increase in the money supply leads to an equal propionate increase in the price level.

Suppose that each​ 0.1-percentage-point increase in the equilibrium interest rate induces a ​$4 billion decrease in real planned investment spending by businesses. In​ addition, the investment multiplier is equal to 4, and the money multiplier is equal to 5. ​ Furthermore, every ​$10 billion decrease in the money supply brings about a​ 0.1-percentage-point increase in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal. a) Calculate by how much the real planned investment must decrease if the Federal Reserve desires to bring about an ​$100 billion decrease in equilibrium real GDP. ​$___billion. (Enter your response rounded to one decimal​ place.) b) Calculate by how much must the money supply decrease for the Fed to induce the change in real planned investment to bring about an ​$100 billion decrease in equilibrium real GDP. ​$___billion. ​(Enter your response rounded to one decimal​ place.) c) Calculate the dollar amount of open market operations that the Fed must undertake to bring about the money supply decrease required for an ​$100 billion decrease in equilibrium real GDP. ​$___billion. ​(Enter your response rounded to one decimal​ place.)

a) 25 billion. (100 / 4 = 25) b) 62.5 billion. (decrease in money supply = decrease in real GDP (25bn) / investment multiplier (4) x 2.50; [0.1 x 25bn = 2.5; 0.1 x 10bn = 1]; 25bn / 1 x 2.50 = 62.5) c) 12.5 billion. ( 25 / 2 = 12.5) NOTE: this is DECREASING!!!

Last​ year, ​$100 million in outstanding bank loans to a developing​ nation's government were not​ renewed, and the developing​ nation's government paid off ​$40 million in maturing government bonds that had been held by foreign residents. During that​ year, however, a new group of foreign banks participated in a ​$126 million loan to help finance a major government construction project in the capital city. Domestic firms also issued ​$48 million in bonds and ​$78 million in stocks to foreign investors. All of the stocks issued gave the foreign investors more than 10 percent shares of the domestic firms. a. Calculate the gross foreign investment in this nation last year. ​$___ million. b. Calculate the net foreign investment in this nation last year. ​$___ million.

a. $252 million. To calculate gross foreign​ investment, use the fact that gross foreign investment is equal to new loans by foreign banks plus bonds issued to foreign investors plus stocks issued to foreign investors. 126+48+78=252 ----------------------------------------- b. $112 million. To calculate the net foreign​ investment, use the fact that net foreign investment is equal to gross investment minus bond payments minus bank loans not renewed​ (the government had to pay off the loans not​ renewed). 252-40-100=112

a. Calculate by how much real planned investment increase if the fed reserve desires to bring about a 100 billion increase in EQ real GDP b. Calculate by how much the money supply change for the fed to induce the change in real planned investment that is needed for a 100 billion increase in EQ real GDP c. Calculate the dollar amount of open market operations that the fed must undertake to bring about the money supply change needed for a 100 billion increase in EQ real GDP.

a. 100/5 = 20 b. 100/5 * 2 = 40 c. 40/5 =8

Suppose that each 0.1 percent- point decrease in the equilibrium interest rate induces a...

a. 120/4 = 30 b. 120/4 x 2.0 = 60 c. 60 / 5 = 12 a. 120/4 = 30 b = 120/4 * 6.0 = 180 c. 180/4 = 45

Suppose that each 0.1​ percentage-point decrease in the equilibrium interest rate induces a ​$10 billion increase in real planned investment spending by businesses. In​ addition, the investment multiplier is equal to 5​, and the money multiplier is equal to 4. ​Furthermore, every ​$20 billion increase in the money supply brings about a​ 0.1-percentage-point reduction in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal. a. Calculate by how much must real planned investment increase if the Federal Reserve desires to bring about a ​$80 billion increase in equilibrium real GDP ​$__ billion. b. Calculate by how much must the money supply change for the Fed to induce the change in real planned investment that is needed for a ​$80 billion increase in equilibrium real GDP ​$__ billion. c. Calculate the dollar amount of open market operations that the Fed must undertake to bring about the money supply change needed for a ​$80 billion increase in equilibrium real GDP ​$__ billion.

a. 16 (80 / 5 = 16) b. 32 (80 x 0.1 = 8; 8 x 4 = 32) c. 8

Suppose that initially the money supply is $ 2 trillion, the price level equals 4, the real GDP is 6 trillion in base-year dollars, and income velocity of money is 12 . Then the money supply increase by 200 billion. a. According to the quality theory of money and prices, calculate the new price level after the increase in money supply ______ b. Percentage increase in money supply = The new value of Ms - The initial Value of Ms / The initial Value of Ms. c. Percentage increase in price level = New price level - Initial price level / Initial price level. d. The percent changes in money supply is ____ percentage changes in the price level.

a. 2.20 x 12 / 6 = 4.4 b. 2.2-2.0/2 x 100 = 10.00 %. c. 4.4-4.0 / 4.0 x 100 = 10.00% d. equal to the

Suppose that each​ 0.1-percentage-point increase in the equilibrium interest rate induces a ​$5 billion decrease in real planned investment spending by businesses. In​ addition, the investment multiplier is equal to 5​, and the money multiplier is equal to 4. ​ Furthermore, every ​$10 billion decrease in the money supply brings about a​ 0.1-percentage-point increase in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal. a. Calculate by how much the real planned investment must decrease if the Federal Reserve desires to bring about an ​$100 billion decrease in equilibrium real GDP. ​$___ billion. ​(Enter your response rounded to one decimal​ place.) b. Calculate by how much must the money supply decrease for the Fed to induce the change in real planned investment to bring about an ​$100 billion decrease in equilibrium real GDP. ​$___ billion. ​(Enter your response rounded to one decimal​ place.) c. Calculate the dollar amount of open market operations that the Fed must undertake to bring about the money supply decrease required for an ​$100 billion decrease in equilibrium real GDP. ​$___ billion. ​(Enter your response rounded to one decimal​ place.)

a. 20 b. 40 c. 10

Suppose that each 0.1​ percentage-point decrease in the equilibrium interest rate induces a ​$10 billion increase in real planned investment spending by businesses. In​ addition, the investment multiplier is equal to 4​, and the money multiplier is equal to 4. ​Furthermore, every ​$10 billion increase in the money supply brings about a​ 0.1-percentage-point reduction in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal. a. Calculate by how much must real planned investment increase if the Federal Reserve desires to bring about a ​$80 billion increase in equilibrium real GDP ​$___billion. b. Calculate by how much must the money supply change for the Fed to induce the change in real planned investment that is needed for a ​$80 billion increase in equilibrium real GDP ​$___billion. c. Calculate the dollar amount of open market operations that the Fed must undertake to bring about the money supply change needed for a ​$80 billion increase in equilibrium real GDP ​$___billion.

a. 20 billion. (80 / 4 = 20) b. 20 billion. (10 / 4 = 2.5; 80 x 0.1 = 8; 8 x 2.5 = 20) c. 5.0 billion. (20 / 10 = 2; 10 / 4 = 2.5; 2 x 2.5 = 5)

Suppose that each 0.1​ percentage-point decrease in the equilibrium interest rate induces a ​$10 billion increase in real planned investment spending by businesses. In​ addition, the investment multiplier is equal to 4, and the money multiplier is equal to 4. ​ Furthermore, every ​$30 billion increase in the money supply brings about a​ 0.1-percentage-point reduction in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal. a. Calculate by how much must real planned investment increase if the Federal Reserve desires to bring about a ​$80 billion increase in equilibrium real GDP ​$___billion. b. Calculate by how much must the money supply change for the Fed to induce the change in real planned investment that is needed for a ​$80 billion increase in equilibrium real GDP ​$___billion. c. Calculate the dollar amount of open market operations that the Fed must undertake to bring about the money supply change needed for a ​$80 billion increase in equilibrium real GDP ​$___billion.

a. 20 billion. (80 / 4 = 20) b. 60 billion. (30 / 4 = 7.5; 80 x 0.1 = 8; 8 x 7.5 = 60) c. 15 billion. (20 / 10 = 2; 30 / 4 = 7.5; 2 x 7.5 = 15)

Suppose that each 0.1​ percentage-point decrease in the equilibrium interest rate induces a ​$5 billion increase in real planned investment spending by businesses. In​ addition, the investment multiplier is equal to 5​, and the money multiplier is equal to 5. ​Furthermore, every ​$30 billion increase in the money supply brings about a​ 0.1-percentage-point reduction in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal. a. Calculate by how much must real planned investment increase if the Federal Reserve desires to bring about a ​$120 billion increase in equilibrium real GDP ​$__billion. b. Calculate by how much must the money supply change for the Fed to induce the change in real planned investment that is needed for a ​$120 billion increase in equilibrium real GDP ​$___billion. c. Calculate the dollar amount of open market operations that the Fed must undertake to bring about the money supply change needed for a ​$120 billion increase in equilibrium real GDP ​$___billion.

a. 24 billion. (120 / 5 =24) b. 144.0 billion. (30 / 5 = 6; 120 x 0.1 = 12; 12 x 6 = 72; 72 x 2 = 144) c. 28.8 billion. (24 / 5 = 4.8; 4.8 x 6 = 28.8)

Suppose that each 0.1 percentage point decrease in the equilibrium interest rate induces a​ $10 billion increase in real planned investment spending by businesses. In​ addition, the autonomous spending multiplier is 2 and the money multiplier is equal to 3. ​Furthermore, every​ $20 billion increase in the money supply brings about a 0.1 percentage point reduction in the equilibrium interest rate. a. How much must real planned investment increase if the Fed desires to bring about a ​$100 billion increase in real​ GDP? ​$___ billion. ​ (Round your answer to a whole​ number.) b. What dollar amount of open market operations must the Fed undertake to bring about the money supply change necessary to bring about a ​$100 billion increase in real​ GDP? ​$___ billion. (Round your answer to a whole​ number.)

a. 50 (100/2) b. 33 (50 x 2 = 100; 100/3 = 33.33 rounded to 33).

Let's denote the price of no maturing bonds ( called a consol) as Pb. the equation that indicates this price is Pb= I/R, where I is the annual net income the bond generates and r is the nominal market interest rate. a. Suppose that a bond promises the holder $500 per year forever. The nominal market interest rate is 4 present. Calculate the bond's current price:____________ b. If the market interest rate increases, the price of the bond will fall as P and r are inversely related, where P b = I/R thus, Pb =________________

a. 500/0.04 = $ 12500 b. 500/0.08 = 6250

​Let's denote the price of a nonmaturing bond​ (called a​ consol) as Pb. The equation that indicates this price is Pb = I(over) r​, where I is the annual net income the bond generates and r is the nominal market interest rate. a. Suppose that a bond promises the holder ​$500 per year forever. The nominal market interest rate is 4 percent. Calculate the​ bond's current​ price: ​$___. ​(Round your answer to the nearest whole​ dollar.) b. Calculate the​ bond's price, if the market interest rate increases to 8 ​percent: ​$___. ​(Round your answer to the nearest whole​ dollar.)

a. 500/0.04 = $12500 b. 500/0.08 = $6250

If there is an inflation gap in the short run, the federal reserve can eliminate the gap in the short run by undertaking a policy action that reduces aggregate demand. But, if federal reserve chooses not to close the gap in the short run, the economy will eventually get back to full employment in the long run. Because when there is an inflationary gap in the short run, then in the long run a new EW will arise as input prices and expectations adjust upwar, causing the aggregate supply to shift upward and to the left and pushing EQ real GDP back to its long-run potential value. a. A monetary policy action that could eliminate an inflationary gap in the short run is ____________ b. If Fed implements the short run monetary policy option instead of simply waiting for the long-run adjustments to take place, then it _______

a. An open market sale of government securities. b. Benefits the society as the inflationary pressures are removed quickly.

Suppose that, initially, the U.S. economy is an aggregate demand-aggregate supply EQ at point A alone the aggregate demand curve AD in the diagram. Now, however, appreciated relative to foreign currencies. This appreciation happens to have no measurable effect on either the short-run or the long-run aggregate supply curve in the united states. it does, however influence U.S aggregate demand. a. As a result of the dollar appreciation, U.S. net export expenditures will ___. b. The aggregate demand curve that could represent the aggregate demand effect of the U.S. dollar's appreciation is ___. c. Federal Reserve may take a certain policy action to prevent the​ dollar's appreciation from affecting equilibrium real GDP in the short run. Which one of the following is not a likely policy action that the Fed will​ take? A. Decreasing the discount rate. B. Decreasing reserve ratios. C. Increasing government spending. D. Buying government securities in the open market.

a. Decrease. b. AD2 will decrease; decrease c. C. Increasing government spending.

Both the traditional Keynesian theory and the new Keynesian theory indicate that the​ short-run aggregate supply curve is horizontal. a. In terms of their ​short-run implications for the price level and real​ GDP, is there any difference between the two​ approaches? ___ b. In terms of their ​long-run implications for the price level and real​ GDP, is there any difference between the two​ approaches? ___

a. No (The traditional Keynesian approach and the​ sticky-price new Keynesian approaches have the same​ short-run implications. If aggregate demand increases​ (or decreases), the equilibrium price level remains unchanged in the short run. The largest possible rise​ (or fall) in equilibrium real GDP takes​ place, given by a movement along the horizontal aggregate supply curve.) b. Yes (The traditional Keynesian approach emphasizes only the​ short-run and fails to contemplate how​ long-run adjustment will take place. In​ contrast, the new Keynesian approach suggests that in the long​ run, firms seeking higher profits will choose to incur menu costs and raise​ (reduce) their prices in responses to increases​ (decreases) in aggregate demand.​ Consequently, equilibrium real GDP eventually returns to a​ long-run equilibrium level.)

Suppose that the market rate of interest is 5 percent and at this interest rate you have decided to hold half your financial wealth as bonds and half as holdings of non interest bearing money. You notice that the market interest rate is starting to rise, however you become convinced that it will ultimately rise to 10. a. As the interest rate rises, the value o your bond holdings will b. If you wish to prevent the value of your financial wealth from declining in the future, you will.

a. decline. b. hold less bonds and more money.

The IMF extends a​ long-term loan to a​ nation's government to help it maintain publicly supported production of goods and services that the government otherwise would have turned over to private companies. a. The above situation indicates that the IMF __________. b. The World Bank makes a loan to companies in an impoverished nation in which government officials typically demand bribes equal to 50 percent of​ companies' profits before allowing them to engage in any new investment projects. The above situation indicates that the World Bank is __________. c. The IMF offers to make a loan to banks in a country in which the​ government's rulers commonly require banks to extend credit to finance​ high-risk investment projects headed by the​ rulers' friends and relatives. The above situation indicates that the IMF _________.

a. is not following its own mission. b. is not carrying out its mission. c. is facing an adverse selection problem.

Consider the following situations currently faced by the World Bank or the International Monetary Fund. The World Bank has extended loans to the government of a developing country to finance construction of a canal with a certain future flow of earnings.​ Now, however, the government has decided to redirect those funds to build a casino that may or may not generate sufficient profits to allow the government to repay the loan. a. This situation is an example of _____ _____ . b. The IMF is considering extending loans to several nations that failed to fully repay loans they received from the IMF during the past decade but now claim to be better credit risks. The IMF is not sure which of these nations are unlikely to fully repay new loans. This situation is an example of _____ _____. c. The IMF is considering extending loans to several nations that failed to fully repay loans they received from the IMF during the past decade but now claim to be better credit risks. The IMF is not sure which of these nations are unlikely to fully repay new loans. This situation is an example of _____ _____. (adverse selection, neither, moral hazard)

a. moral hazard b. adverse selection c. moral hazard

When the rate of interest in the economy falls, there will be

an increase in the market price of existing bonds

If the Fed sells bonds through its open market operation, then there is

an increase in the supply of bonds and a fall in the price of existing bonds

Frictional unemployment

arises because individuals take time to search for the best job opportunities

Structural Unemployment

caused by rigidities throughout the economy (i.e. Government imposed minimum wage, legal restrictions for occupations, Union activity that sets wages above equilibrium...)

A shift in the Phillips Curve

example

During 2008, the Fed acted to keep the nominal federal funds rate very close to zero because the fed

extended loans to select institutions at very low nominal rates of interest through its credit policy programs.

Since the Fed began implementing credit policy alongside traditional monetary policy in 2008, it has

failed to achieve a consistently counter-recessionary monetary policy in conjunction with its credit policy.

Suppose that a contractionary monetary policy has caused aggregate demand to fall to AD1​, as shown in the graph at right. The economy is currently in​ short-run equilibrium at point E1. At this​ point, unemployment is ___ ___ the natural rate of unemployment and spells of unemployment are ___ ___ average.​ Long-run equilibrium will be restored when price expectations have time to adjust to a new ___level.

greater than longer than lower

the indirect effect of an increase in the money supply is to

increase aggregate demand as interest rates fall and investment spending increases.

The direct effect of an increase in the money supply is to

increase the AD as people spend their excess money balances.

Traditional Keynesian analysis suggests that decreases in the money supply shift the aggregate demand curve by decreasing

investment. changes in interest rate impact investment spending only according to this model.

Traditional Keynesian analysis suggests that increases in the money supply shift the aggregate demand curve through increasing

investment. changes in interest rates impact investment spending according to the Keynesian theory.

Keynesians believe that monetary policy applied during recessions

is ineffective since changes in the money supply have little impact on the interest rate. The Keynesians argue that the investment function is relative inelastic to changes in the interest rate.

Suppose that the central bank under took an expansionary monetary policy. draw the new expenditure line. b. Expansionary monetary policy will

lower interest rates.

In an open economy, the net export effect

may offset an expansionary fiscal policy but enhance an expansionary monetary policy

The money demand function implies that money demand is

negatively related to interest rates.

Dead capital is a capital resource without clear title of _____.

ownership.

In order to induce private banks to maintain substantial reserve deposits with the federal reserve banks, since 2008 the FED has

paid banks an interest rate that is higher than the federal funds rate on their reserves.

Keynesians argue that expansionary monetary policy during recessions will cause.

people to accumulate money.

The precautionary demand for holding money arises because

people want to be able to make unexpected purchases or to meet emergencies.

If the rational expectations hypothesis is valid, there is pure competition, and all prices and wages are flexible, then the _____ _____ proposition follows: Fully anticipated monetary policy actions cannot alter either the rate of unemployment or the level or real GDP.

policy irrelevance

The Feds credit policy since 2008 has

provided banks more liquidity given private banks more time to recover from financial crisis led to an expansion of asymmetric information problems by reducing banks incentives to screen and monitor borrowers.

Suppose that the central bank undertook a contractionary monetary policy. c. Contractionary monetary policy will _____ interest rates.

raise interest rates.

The _____ ____ hypothesis assumes that individuals' forecasts incorporate all readily available information, including an understanding of government policy and its effects on the economy.

rational expectations

Even if all prices and wages are perfectly flexible, aggregate _____ shocks such as sudden changes in technology or in the supplies of factors of production can cause national economic fluctuations. To the extent that these _____ _____ cycles predominate as sources of economic fluctuations, the case for active policymaking is weakened.

real real business

According to the Keynesian theory, an decrease in the money supply increases the interest rate and decreases investment spending. The result of this is that

real GDP decreases by a larger amount than the change in investment.

According to the Keynesian theory, an increase in the money supply decreases the interest rate and increases investment spending. The result of this is that

real GDP increases by a larger amount than the change in investment.

For a given rate of growth of aggregate real​ GDP, higher population growth tends to _____ the growth of per capita real GDP. To the extent that increased population growth also leads to greater _____ participation that raises the growth of total real​ GDP, a higher population growth rate can potentially _____ the rate of growth in per capita real GDP. In​ general, the extent of _____ freedom does not necessarily increase the rate of economic growth. A greater degree of _____ ​freedom, however, does have a positive effect on a​ nation's growth prospects.

reduce labor force; increase political; economic

an expansionary monetary policy results in lower interest rates, which in turn

reduces the international price of the dollar and increases net exports.

Expansion of the money supply during a recession, according to the Keynesians, will

result in virtually no change in investment and aggregate demand. they argue that the investment function is relative inelastic to changes in the interest rate.

The economy is currently experiencing a recessionary gap. The government is contemplating the use of expansionary monetary policy. Answer the following questions by applying Keynesian theory to this situation. The Keynesians feel that changes in the money supply lead to _____ changes in the interest rate. This is because Keynesians believe that if monetary authorities increase the money supply during a​ recession, individuals A. make no significant change to their investment spending. B. significantly decrease their investment spending. C. increase the rate in which they borrow. D. significantly increase their investment spending.

small A. make no significant change to their investment spending.

The Keynesians feel that changes in the money supply lead to

small changes in the interest rate.

Contractionary monetary policy by the fed can be hampered by

the ability of US citzens and businesses to obtain dollars from foreign sources

The federal reserves credit policy refers to

the feds direct lending to financial and non financial firms

The opportunity cost of holding money refers to

the interest that could have been earned if the money balances had been transferred to an interest bearing asset.

Suppose that a rise in oil prices has caused the​ short-run aggregate supply curve to shift leftward to SRAS1​, as shown in the graph at right. The economy is currently in​ short-run equilibrium at point E1​, and the rise in oil prices is expected to be permanent.

this is a close example, note: (graph should display LRAS2, SRAS3, SRAS2, LRAS1 and SRAS1 [vertically] and AD1 slanted downward L-to-R and 3 E{equilibrium} level increasing from E1, E2, with E3 the highest price level and lowest Real GDP.)