Econ 251

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Econ 251
2011-04-30 00:47:49

Ch. 18
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  1. When Congress established the Federal Reserve in 1913, its main responsibility was to
    To make discount loans to banks suffering from large withdrawals by depositors.
  2. Congress broadened the Fed's responsibility since
    the 1930's as a result of the Great Depression
  3. What are the monetary policy goals of the Fed?
    Maintain stability of financial markets and institutions, price stability, and high employment
  4. What is a banking panic?
    When banks experience runs at the same time
  5. Explain how the Federal Reserve helps to prevent bank panics
    The Fed acts as a lender of last resort, making loans to banks so that they can pay off their depositors.
  6. Why is price stability one of the Fed's monetary policies?
    • Promotes economic growth
    • If inflation is low, Feds have flexibility to help with recessions
    • Rising prices erode the value of money as a medium of exchange and store value.
  7. Problems of high inflation?
    • 1. Creates difficulties for the Fed to conduct monetary policy
    • 2.Reduces the real value of money
    • 3. Reduces economic growth
  8. True or False

    Stable prices make it easier to plan for the future, so expectations can remain stable, which means it is less costly to make loans
  9. How are asset prices different from the 4 goals in the chapter?
    Asset prices deal with specific type of wealth that carries risk associated with individual firms
  10. A monetary policy target used by the Feds?
    Interest Rate
  11. The Fed uses policy targets of interest rate and/or money supply because
    It can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level
  12. When the Fed Reserve conducts an open market purchase of Treasury securities, the money supply..
    increases as banks, now holding excess reserves, lower their lending (interest) rate to convert these reserves into new loans
  13. The federal funds rate is
    The interest rate that banks charge each other for overnight loans
  14. The federal funds rate is very important for
    The Fed's monetary policy. Uses the rate as a monetary policy target bc it can control the rate through open market operations, and other interest rates usually follow the movement of the fed funds rate
  15. If the Fed purchases 120 million worth of Treasury bills from the public, the money supply will
  16. To decrease the federal funds rate, the Fed must
    increase the money supply
  17. To pour money into the banking system and to increase the money supply, the Fed
    buys bonds on the open market, which increases bank reserves
  18. An increase in interest rates affects aggregate demand by
    shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level
  19. As the interest rate increases, consumption, investment, and net exports
    decreases because these are interest-sensitive spending components and aggregate demand decreases as shown by the shift of the aggregate demand curve to the left
  20. If the Fed believes the economy is about to fall into recession, it should
    use expansionary monetary policy to lower the interest rate and shift AD to the right
  21. If the Fed believes that the interest rate is about to increase, it should
    use contractionary monetary policy to increase the interest rate and shift AD to the left
  22. Capital spending, is spending on , and a reduction in capital spending will decrease .
    pant and equipment/investment
  23. By keeping the money in the bank you are referring to in the reserves in banks.

    The real problem was the banks were not the reserves.

    The reason for this may have been a lack of
    an increase/lending/borrowers
  24. What is the term for a falling price level?
  25. When central banks raise target rates, it should slow the economy down, which would the rate of growth of prices.
  26. Deflation impacts price stability
  27. Signs of inflation might signal a turn in the business cycle, requiring .
    a change in policy
  28. Removing the punch bowl refers to engaging in policy.

    "Just as the party gets going refers to where GDP is greater than potential GDP which will ressult in
    contractionary/an increase in the inflation rate
  29. The money supply affects real GDP directly
  30. Expansionary fiscal policy is likely to stimulate aggregate , which can cause .
  31. Budget deficits can cause inflation if
    a central bank purchases the govt bonds that were used to finance the budget deficit, it will mean and increase in the money supply, which causes inflation.
  32. A monetary Rule is
    A plan for increasing the money supply at a constant rate regardless of prevailing economic condition
  33. The Fed has used the federal funds rate as its monetary policy target and not the money supply for 20 years bc
    they cannot target both at the same time. They had to choose between targeting an interest rate and targeting the money supply
  34. Why might a move to inflation targeting temp. increase the unemployment rate?
    Lower inflation targets can lead to a reduction in aggregate demand, which could reduce output in the short run
  35. The german hyperinflation of the early 1920's was caused by
    the German govt raising funds for expenditures by selling bonds to the central bank
  36. They money demand curve has a
    negative slop because an increase in the interest rate decreases the quantity of money demanded
  37. Using the money demand supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to
  38. An increase in real GDP can shift
    money demand to the right and increase the equilibrium interest rate
  39. When the Fed Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to
    sell Treasury bills
  40. Changes in the federal funds rate usually result in
    changes in both short and long term interest rates, with more of an affect on short term rates.
  41. The ability of the federal reserve to use monetary policy to affect economic variable such as real GDP depends upon its ability to affect
    real interest rates
  42. Quantitive Easing
    response to already low interest rates. The Fed began buying 10-yr Treasury notes and certain mortgage securities to keep interest rates low.
  43. Monetary policy could be pro cyclical if the Federal Reserve
    is late recognizing that a recession has begun and conducts expansionary monetary policy
  44. Most of the pressure for a monetary growth rule has disappeared because since 1980
    the relationship bet movements in the money supply and movements in real GDP and the price level have become much weaker
  45. Using the taylor rule, if the current inflation rate exceeds the target inflation rate and real GDP exceeds potential GDP, then the federal funds target rate the sum of the current inflation rate plus the real equil. federal funds rate
    will be greater than
  46. A financial asset can be considered a security if
    it can be sold in a secondary market
  47. To reassure investors, Congress sponsored Fannie mar and Freddie Mac to stand bet. investors and banks that grant mortgages. Freddie Mae and Mac
    sell bonds to investors and use the funds to purchase mortgages from banks
  48. The larger the fraction of an investment financed by borrowing
    he greater the potential return and potential loss on that investment
  49. The failure of Purchasing Power Parity to hold well between the US and the British pound in the mid 1970's was said by the commentary
    Monetary shocks were far from dominant (oil prices) and the inflation diff. bet the 2 countries was not that large
  50. Fiscal policy refers to changes in
    Federal taxes and purchases that are intended to achieve macroeconomic policy objectives
  51. The increase in the amt govt collects in taxes when the economy expands and the decrease in the amt of the govt collects in taxes when the economy goes into a recession is an example of
    automatic stabilizers
  52. Before the great depression the govt spending took place at and after it took place at the .
    state and local levels/federal level
  53. The largest source of federal govt revenue in 2008 was
    ind. income taxes
  54. Since the Social Security system began in 1935, the number of workers per retiree hasc
    continually declined
  55. Expansionary fiscal policy involves
    increasing got purchases or decreasing taxes
  56. Which would induce Congress to conduct contractionary fiscal policy? A significat increase in
  57. The tax multiplier is smaller in absolute value than govt purchases multiplier bc some portion of the decrease in taxes
    will be saved by individuals and not spent, and some portion will be spent on imported goods
  58. Real GDP is 12.6 and potential is GDP. To move the economy back to potential, the govt should
    decrease by .2
  59. The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy bc
    the Federal Reserve can more quickly change monetary policy than the president can change fiscal policy
  60. The impact of crowding out may be the least
    during a deep recession
  61. The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy were
    at potential GDP
  62. The federal govt debt equals
    the total value of US treasury bonds outstanding
  63. Supply-side economics
    Tax rates, marginal tax rates affect the incentive to work, save, and invest, and therefore, aggregate supply.
  64. Commentary- the size of the multiplier effect is likely to vary with
    context and time period involved
  65. Commentary: country member of Eurozone and has difficulties in borrowing in the past years is
  66. The natural rate of unemployment
    The unemployment rate that exists when the economy is at potential GDP
  67. An increase in inflation will decrease unemployment if the inflation is by both workers and firms.
  68. An increase in the expected inflation rate will
    Shift the short-run Phillips curve to the right
  69. Increase in natural rate of unemployment
    An increase in the number of younger, less skilled workers in the economy
  70. What impact does monetary policy have on the long-run phillips curve?
    monetary has no impact on the long run
  71. When did inflation remain above 5 percent each year?
  72. When inflation is very low, how do workers and firms adjust their expectations of inflation?
    They tend to ignore inflation
  73. If inflation is greater than expected inflation, what is the relationship bet the actual real wage and the expected real wage?
    The actual real wage will be lower than the expected real wage
  74. If workers and firms have rational expectations, including knowledge of the policy being used by the federal reserve
    expansionary monetary policy is ineffective
  75. The major criticism of real business cycle model is
    neg. technology shocks are uncommon and cant explain all business cycle fluctuations.
  76. A fall price level is called and a fall in the rate of inflation is called .
  77. Data from the 2007-2009 recession indicates the current trade-off bet unemployment and inflation is such that
    it is much stronger now than it was during in the mid 1990s.
  78. Commentary: The Chinese have amassed very large amounts of official US dollar assets as foreign exchange as reserves in part bc
    They were concerned about the experiences of southeast Asian economies in 1997 disrupted economies.
  79. An American citizen purchasing a new Toyota made in Japan would be in Japan's account. c
  80. Increase in the US current account would result from
    an increase in the balance of trade
  81. When the US sends money to other countries to help tsunami survivors, it is recorded in the account.
  82. An increase in capital outflows from the US will
    decrease the balance on the financial account
  83. If the balance of the current account in the US is -500 then the balance on the financial account is
  84. How does an increase in a country's exchange rate affect its balance of trade?
    An increase in the exchange rate raises imports, reduces exports, and reduces the balances of trade
  85. Currency traders expect the value of the dollar to fall. What effect will this have?
    Demand for dollars will decrease and supply will increase
  86. If the exchange rate changes from 2 =1GBP to 2.01=1GBP then
    the dollar has depreciated
  87. An expansionary monetary policy in the US should
    decrease the foreign currency price of US exports
  88. Since 2002, the US dollar has to other currencies
    lost value
  89. higher inflation rate in the US affect real exchange rate bet. countries
    the real exchange rate will rise
  90. If foreign investment is negative, then
    domestic investment must be greater than national saving
  91. What impact might increase in the budget deficit have on interest rates and exchange rates?
    they increase
  92. Commentary: concept of identity for ind.
    may be needed for a fuller understanding and is made harder to explore bc of the limited roles of govt
  93. Commentary: U-shaped cost curve suggests
    issues of optimal size, smaller and larger size
  94. When the value of a currency is determined by supply and demand, the exchange rate is defined as
    managed float
  95. If used gold like 1849,
    raise money supply but no impact on price level
  96. Factors that are not imp in determining exchange rate fluctuations in the long run?
    speculating in currency markets
  97. Countries that use the euro face problems such as
    unable to conduct monetary policy
  98. If inflation in Russia is greater than the US than
    the value of the dollar will rise in the long run
  99. An increase in the demand for American goods from other countries will increase
    the value of the dollar in the long run
  100. Pegging a country's exchange rate can be advantageous if
    investors believe the dollar to be more stable than the domestic currency
  101. Which 2 countries account for foreign purchases of US stocks and bonds
    China and UK
  102. If interest rates in the US rise, the value of the dollar will as the foreign investors their holdings of US investments
  103. In order to support an undervalued euro, the European Central Bank must dollars. This will cause the rate of inflation in the EU to .
  104. The bretton woods system had problems like
    dollars held by foreign central banks exceeded gold reserves held by the US.
  105. Commentary: An ideal for fixed exchange rates bet countries would seem to require
    uniform inflation rates across countries
  106. During recession, the only reluctance was from
    western european countries that had stronger social safety nets