Macroeconomics MyEconLab Ch.14 Homework

Looking at the federal funds rate since​ 2000, identify periods during​ which, with the benefit of​ hindsight, the rate might have been kept too low. Identify periods during which it might have been too high. Choose the statement that is incorrect.

Between 2002 and 2004 and again in and since​ 2008, the federal funds rate was set at historically high​ levels, which lead to increasing unemployment.

Top Economist says America Could Plunge into Recession Robert​ Shiller, Professor of Economics at Yale​ University, predicted that there was a very real possibility that the United States would be plunged into a​ Japan-style slump, with house prices declining for years. ​Source: timesonline.co.uk, December​ 31, 2007 How can monetary policy prevent house prices from​ falling?

If the Fed had agreed with Robert Shiller in December​ 2007, it might have a different policy and lowered the federal funds rate more aggressively. By making the quantity of money grow rapidly.

Suppose that the Reserve Bank of New Zealand is following the Taylor rule and in​ 2018, it sets the official cash rate​ (the N.Z. equivalent of the federal funds​ rate) at 6.5 percent a year. If the inflation rate in New Zealand is 3.0 percent a year and the target inflation rate is 2 percent a​ year, what is its output​ gap? GAP=[FFR-2-INF - 0.5(INF - 2)]/ 0.5 FFR - federal funds rate INF - inflation rate GAP - output gap

The output gap is 2 percent.

The Federal Reserve Act of 2000 instructs the Fed to pursue its goals by​ "maintain[ing] long-run growth of the monetary and credit aggregates commensurate with the​ economy's long-run potential to increase​ production." Has the Fed followed this​ instruction? The Fed has followed this​ instruction, as seen by the fact that the core inflation rate has remained within or close to the range of between 1 and 2 percent a year. Why might the Fed increase money by more than the potential to increase​ production? The Fed might increase money by more than the potential to increase production because​ _______.

True the economy is in a recession and the Fed wants to move the economy back to potential GDP

The​ Fed's mandated policy goals are​ "maximum employment, stable​ prices, and moderate​ long-term interest​ rates." Explain the conflict among these goals in the short run. The​ short-run conflict among these goals arises​ because, when the Fed lowers the federal funds rate to combat a​ recession, the unemployment rate​ ______ and the price​ ______.

decreases; increases

The​ Fed's mandated policy goals are​ "maximum employment, stable​ prices, and moderate​ long-term interest​ rates." Explain the harmony among these goals in the long run. In the long​ run, _______.

price stability creates the best environment for saving and investment​ decisions, which brings economic growth and maximum​ employment, and delivers a nominal interest rate close to the real interest rate

Suppose that the Reserve Bank of New Zealand is following the Taylor rule and in​ 2018, it sets the official cash rate​ (the N.Z. equivalent of the federal funds​ rate) at 1.5 percent a year. If the inflation rate in New Zealand is 1.0 percent a year and the target inflation rate is 2 percent a​ year, what is its output​ gap?

The output gap is negative 2 percent.

Suppose Congress decided to strip the Fed of its monetary policy independence and legislate interest rate changes. How would you expect the policy choices to​ change? Which arrangement would most likely provide price ​ stability? The most likely result in the short run would be​ ______. In the long​ run, the inflation rate would​ ______. Price stability is most likely to remain the​ Fed's primary goal under an arrangement in which where Congress plays no role in making monetary policy decisions.

an increase in money growth and falling interest​ rates; rise and nominal interest rates would rise True

If the Fed had adopted inflation targeting and used the Taylor rule to hit its​ target, how would the course of the federal funds rate have been different from the course that it did​ take? How would inflation and the output gap have been​ different? If the Fed had adopted inflation targeting and used the Taylor rule to hit its target​, the federal funds rate would have been higher​ ______, and lower​ ______. If the Fed had adopted inflation targeting and used the Taylor rule to hit its target​, the inflation rate would have been ​ ______ , and the recessionary gap would have been​ ______ in the years after 2011.

between 2001 and 2005 and after​ 2011; in 2007 lower; larger

Bernanke on Inflation Targeting Inflation targeting promotes​ well-anchored inflation​ expectations, which facilitate more effective stabilization of output and employment. Thus inflation targeting can deliver good results with respect to output and employment as well as inflation. ​Source: Federal Reserve​ Board, remarks by Ben Bernanke to the National Association of Business Economists What is inflation​ targeting? Inflation rate targeting is a monetary policy strategy in which​ the______. How do​ "well anchored inflation​ expectations" help to achieve more stable output as well as low​ inflation? By having​ "well-anchored inflation​ expectations", all of the following occur except​ _________.

central bank commits to an explicit inflation target and to explaining how its actions will achieve that target aggregate supply grows at a faster pace than aggregate demand

Bernanke on Inflation Targeting Inflation targeting promotes​ well-anchored inflation​ expectations, which facilitate more effective stabilization of output and employment. Thus inflation targeting can deliver good results with respect to output and employment as well as inflation. ​Source: Federal Reserve​ Board, remarks by Ben Bernanke to the National Association of Business Economists Explain how inflation targeting as described by Ben Bernanke is consistent with the​ Fed's dual mandate. The​ Fed's dual mandate is stable prices and maximum employment. Inflation rate targeting is​ ______.

consistent with the​ Fed's dual mandate because it leads to stable​ prices, which is the best environment for households and firms to make the saving and investment decisions that bring economic growth and maximum employment

What is the core inflation rate and why does the Fed regard it as a better measure on which to focus than the​ CPI? The core inflation rate is the rate of increase in the​ ______. The Fed regards this as a better measure on which to focus than the CPI because​ ______.

core PCE deflator it is less volatile than the total CPI inflation rate and the Fed believes that it provides a better indication of whether price stability is being achieved

Top Economist says America Could Plunge into Recession Robert​ Shiller, Professor of Economics at Yale​ University, predicted that there was a very real possibility that the United States would be plunged into a​ Japan-style slump, with house prices declining for years. ​Source: timesonline.co.uk, December​ 31, 2007 Monetary policy that decreases the recessionary gap​ ______.

increases the real GDP growth rate two years later

U.S. Dollar Falls as FOMC Holds​ Rates, Raises Concern Over Low Inflation As​ expected, the FOMC announced it would hold the federal funds rate steady in the range of 1.00 to 1.25 percent. But the​ Fed's remark that inflation is expected to stay​ "somewhat below" 2 percent in the near term spooked the foreign exchange market and the dollar fell. ​Source: DailyFX​, July​ 26, 2017 How does the federal funds rate influence the U.S. dollar exchange​ rate, other things remaining the​ same? A rise in the federal funds rate increases the​ ______ U.S. dollars and​ ______ the U.S. dollar exchange rate. How does an expected future change in the federal funds rate influence the U.S. dollar exchange​ rate, other things remaining the​ same? Other things remaining the​ same, if the federal funds rate is expected to rise next​ month, the U.S. dollar exchange rate will​ ______ today as traders​ ______ dollars ahead of an expected​ ______ in the exchange rate. Explain why the​ Fed's remark about expected future inflation changed expectations about the federal funds rate and how that change influenced the U.S. dollar exchange rate. The U.S. dollar exchange rate fell when the Fed said it expected inflation to remain below 2 percent because it​ ______ the expected future federal funds​ rate, which​ ______ the demand for dollars.

demand​ for; raises rise; buy; rise lowered; decreased

Greenspan Says Economy Strong The central bank chairman said inflation was​ low, consumer spending had held up well through the​ downturn, housing-market strength was likely to​ continue, and businesses appeared to have unloaded their glut of​ inventories, setting the stage for a rebound in production. ​Source: cnn.com, July​ 16, 2002 In the situation described by Alan​ Greenspan, you would expect the Fed to​ _______.

do nothing until expectations of increased inflation are reported

During 2017 the inflation rate increased slightly but remained in the​ "comfort zone" and the unemployment rate was low. Why might the Fed decide to raise interest rates in this​ situation? The Fed might decide to raise interest rates ​ ______ .

if it thought that the rising inflation rate was a greater problem than unemployment

Now that the Fed has created​ $4 trillion of bank​ reserves, and with the federal funds rate equal to the interest rate on​ reserves, how would you expect a further open market purchase of securities to influence the federal funds​ rate? Why? A further open market purchase of securities would​ ______ the monetary base​ ______ the federal funds​ rate, because​ ______ .

increase; but not​ change; the federal funds rate cannot fall below the interest rate on reserves

Fiscal 2016 Deficit Up More Than GDP In Fiscal​ 2016, for the first time since​ 2009, the federal budget deficit as a percentage of GDP increased. CBO projects that over the next​ decade, accumulating deficits will drive government debt to its highest percentage of GDP since after World War II. ​Source: Congressional Budget Office How would the budget deficit change in 2018 and 2019 if the Fed moved interest rates​ up? And how would the budget deficit change in 2018 and 2019 if the​ Fed's monetary policy led to a rapid depreciation of the​ dollar? If the Fed moved the interest rate​ up, the budget deficit in 2018 and 2019 would​ ______. If the​ Fed's monetary policy led to a rapid depreciation of the​ dollar, the budget deficit in 2018 and 2019 would​ ______.

increase; either increase or decrease

From 2009 through​ 2017, the​ long-term real interest rate paid by the safest U.S. corporations fell from 5.5 percent a year to 4 percent a year. During most of that​ period, the federal funds rate was roughly constant at 0.25 percent a year. What do you think happened to inflation expectations between 2009 and 2017 and​ why? Inflation expectations between 2009 and 2017 most likely​ ______.

increased, because the nominal federal funds rate was constant and real rates fell

From 2009 through​ 2017, the​ long-term real interest rate paid by the safest U.S. corporations fell from 5.5 percent a year to 4 percent a year. During most of that​ period, the federal funds rate was roughly constant at 0.25 percent a year. How does the federal funds rate influence the​ long-term real interest​ rate? A fall in the federal funds rate​ ______ the supply of bank loans and the supply of loanable​ funds, and​ ______ the equilibrium real interest rate.

increases; lowers

1. What was the state of the U.S. economy in the summer of 2017 when the Fed made the decision to keep the federal funds rate​ steady? Choose the statement that is incorrect. In the summer of 2017 when the Fed made the decision to keep the federal funds rate​ steady, ______. 2. What was the FOMC majority expectation about future​ employment, real​ GDP, and inflation in June​ 2017? In June​ 2017, the FOMC majority expected a further increase in the federal funds rate would ​ ______. 3. How would an earlier and faster rise in interest rates influence aggregate​ demand, the output​ gap, and​ inflation? An earlier and faster rise in interest rates would​ ________.

inflation was rising rapidly and was already beyond the top end of the comfort zone maintain full​ employment, keep the output gap​ small, and keep inflation low slow aggregate demand growth

1. The state of the economy in 2010 was particularly unusual for all of the following reasons except​ ______. 2. At the time of the news​ article, the Fed expected 3. Members of the FOMC who want quantitative easing believe that the result will be​ ______ in bank reserves and in the supply of loanable​ funds, and​ ______ in aggregate demand. 4. Fed​ "hawks" believe that the result of quantitative easing will be​ ______ in the real interest rate and​ ______ in the price level. 5. The exchange rate​ ______ with quantitative easing. Supporters of quantitative easing believe this action will​ ______ net exports and aggregate demand.

investment was at a record high low future​ employment, low real GDP​ growth, and low inflation. an​ increase; an increase no​ change; a rise decreases; increase

From 2009 through​ 2017, the​ long-term real interest rate paid by the safest U.S. corporations fell from 5.5 percent a year to 4 percent a year. During most of that​ period, the federal funds rate was roughly constant at 0.25 percent a year. What role does the​ long-term real interest rate play in the monetary policy transmission​ process? When the​ long-term real interest rate rises all of the following occur except ​______.

it increases net exports

During 2017 the inflation rate increased slightly but remained in the​ "comfort zone" and the unemployment rate was low. Why might the Fed decide to try to lower interest rates​ (or stimulate in other​ ways) in this​ situation? In this​ situation, the Fed might lower the interest rate if​ _______.

it thought that unemployment was a greater problem than the rising inflation rate

Greenspan Says Economy Strong The central bank chairman said inflation was​ low, consumer spending had held up well through the​ downturn, housing-market strength was likely to​ continue, and businesses appeared to have unloaded their glut of​ inventories, setting the stage for a rebound in production. ​Source: cnn.com, July​ 16, 2002 In the year before Alan​ Greenspan's optimistic​ assessment, the Fed​ ______

lowered the federal funds rate to increase aggregate demand

Philly​ Fed's Plosser Opposes QE3 Federal Reserve Bank of Philadelphia president Charles Plosser does not think that monetary policy can​ "do much to speed up the slow​ progress" in the labor market and opposes the​ Fed's latest round of​ stimulus, known as​ QE3, saying he does not think it prudent to risk the​ Fed's hard-won credibility. ​Source: Philadelphia Inquirer​, September​ 25, 2012 Describe the QE3 asset purchases that are causing Charles Plosser​ concern, and how the asset purchases might damage the​ Fed's credibility? Charles Plosser is concerned with the QE3 asset purchases of​ ______. These asset purchases might damage the​ Fed's credibility if they cause people to question the​ Fed's commitment to​ ______.

mortgage-backed securities; price stability

During 2017 the inflation rate increased slightly but remained in the​ "comfort zone" and the unemployment rate was low. Explain the challenge that low inflation and low unemployment poses for the Fed. When both inflation and unemployment are​ low, the Fed must decide when to start​ ______ the federal funds​ rate, and how steep a path to put it on. It wants to avoid​ ______ by doing too little too​ late, and​ ______ by doing too much too early.

raising; inflation; recession

Dollar Reaches New Low vs. Yen Traders continued to make bets in favor of the​ yen, sending the dollar to a record low against the Japanese currency. ​Source: The Wall Street Journal​, August​ 20, 2011 When traders continue to make​ "bets in favor of the​ yen", they believe that the value of the yen will​ ______. The U.S. exchange rate​ ______.

rise, which decreases the demand for the U.S. dollar and increases the supply of the U.S.​ dollar; falls

Fiscal 2016 Deficit Up More Than GDP In Fiscal​ 2016, for the first time since​ 2009, the federal budget deficit as a percentage of GDP increased. CBO projects that over the next​ decade, accumulating deficits will drive government debt to its highest percentage of GDP since after World War II. Source: Congressional Budget Office How does the federal government get funds to cover its budget​ deficit? The federal government gets funds to cover its budget deficit by​ ______. How does financing the budget deficit affect the​ Fed's monetary​ policy? Financing the budget deficit​ ______.

selling government securities does not directly affect the​ Fed's purchases and sales of government securities

Fiscal 2016 Deficit Up More Than GDP In Fiscal​ 2016, for the first time since​ 2009, the federal budget deficit as a percentage of GDP increased. CBO projects that over the next​ decade, accumulating deficits will drive government debt to its highest percentage of GDP since after World War II. ​Source: Congressional Budget Office How was the budget deficit of 2016 influenced by the​ Fed's low interest rate​ policy? The budget deficit of 2016 was​ ______ than it would have been if the​ Fed's interest rate had been​ higher, because the low interest rate​ ______.

smaller; decreased the interest rate on the government debt

1. Choose the statement that is incorrect. The state of the economy in 2011 when the Fed made the decision to undertake operation twist was that​ ______. 2. At the time of the news​ article, the Fed expected​ ______ future employment and real GDP​ growth, and​ ______ inflation. 3. Operation twist was designed to​ _______the supply of​ short-term loanable funds and​ _______ the supply of​ long-term loanable funds. 4. We would expect the effects on real GDP and the price level to be​ _______.

the market for loanable fund was not in equilibrium low; low decrease; increase spread out over a number of months and even years because although the fall in the​ long-term interest rate may occur quickly it will take some time for firms to change their investment plans in response

Fed's Evans: Offers Full Support for New Stimulus Federal Reserve Bank of Chicago President Charles Evans expressed strong support for the new stimulus provided by the central bank​ saying, "This was the time to​ act" and​ adding, "I am optimistic that we can achieve better outcomes through more monetary policy​ accommodation." ​Source: The Wall Street Journal​, September​ 18, 2012 1. ​Why, in the economic conditions of September​ 2012, was Charles Evans happy to see the Fed stimulating the​ economy? In September​ 2012, Charles Evans was happy to see the Fed stimulating the economy because​ ______. 2. What would be the immediate effects of the​ Fed's QE3 and other stimulative​ actions? The immediate effects of the​ Fed's QE3 and other stimulative actions is​ ______ in​ banks' reserves and​ ______ in the​ long-term interest rate. 3. What would be the ripple effects of the​ Fed's QE3 and other stimulative​ actions? The ripple effects of the​ Fed's QE3 and other stimulative actions include all of the following except​ ______. 4. What are the risks arising from greater monetary​ stimulus? The risks from greater monetary stimulus are​ ______.

there was a large recessionary gap and the possibility of the economy weakening further an​ increase; a fall a fall in the inflation rate a period of inflation

The​ Fed's mandated policy goals are​ "maximum employment, stable​ prices, and moderate​ long-term interest​ rates." Based on the performance of U.S. inflation and​ unemployment, which of the​ Fed's goals appears to have taken priority since​ 2000? Based on the performance of U.S. inflation and unemployment since​ 2000, ______.

the​ Fed's goal of stable prices has taken priority

What is the Beige Book and what role does it play in the​ Fed's monetary policy​ decision-making process? The Beige Book is​ ______. The Beige Book​ ______.

the​ Fed's summary of the current state of the economy is the starting point for the​ Fed's decision-making process