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The new Keynesian Model

emphasizing on the importance of sticky wages and prices

The New Classical model

its central idea is workers and firms have rational expectations

the Monetarist model

advocate that the quantity of money should be increased at a constant rate

The real business cycle model

focuses on how productivity shocks explain fluctuations in real GDP

The proponents of Rational expectations and monetarism think

that the federal reserve should adopt a constant monetary growth rule

Monetarists believe

changes in the money supply affect the level of production in a country in the short-run but only affect the price-level in the long run

monetarism is a school put forth by

milton friedman

milton Friedman of monetarism

argued that economy would most likely be at potential gdp

if workers and firms have a rational expectation

they form there expectations using all the information avaliable to them

The real business cycle model

increase in aggregate demand does not affect gdp

Tool brothers a residential home builder did well during the recession in 2001 but did not do so well in 2007 after the housing bubble burst

because the Fed lowered interest rates in 2001 but did not believe that cutting the interest rate in 2007 would be enough to revive the housing market

If the probability of losing your job remains low

a recession would be a good time to purchase a home because the fed usually lowers interest rates during this time

fed lowers interest rates for housing during a

recession

monetary policy refers to the actions the

federal reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives

The federal reserve system was established in

1913

The federal reserve system was established because

to prevent bank panics

the goals of monetary policy tend to be interrelated for example

when the fed pursues the goal of high employment it also can achieve the goal of growth simultaneously

the federal reserves two main monetary policy targets are

money supply and interest rate

federal reserve is a

monetary policy

an increase in the interest rate

increases the opportunity cost of holding money

an increase in the price level causes

the money demand curve to shift to the right

real GDP increases money demand curve

from left to right

an increase in interest rates

decreases investment spending on machinery, equipment and factories , consumption spending on durable goods and net exports

an increase in interest rate

decreases spending in general

for purposes of monetary policy

the federal reserve has targeted the interest rate known as federal funds rate

increase in the demand for treasury bills will

increase interest rate on treasury

when demand increases

the interest rate will too

an increase in real GDP can shift money demand to the

right and increase the equilibrium interest rate

using the money demand and money supply model

an open market purchase of treasury securities by the federal reserve would cause the equilibrium inetrest rate to decrease

for an initial long-run macroeconomic equilibrium if the federal reserve anticipated that next year aggregate demands would grow significantly s;lower than long run aggregate supply

then the federal reserve would most likely decrease interest rates

if the federal reserve raises or lowers interest rates to late it could result in a

pro cyclical policy that destabilizes the economy

Most consumer goods are also considered procyclic

because consumers tend to buy more discretionary goods when the economy is in good shape

changes in interest rates affect all four components of aggregated demand

false

Expansionary monetary policy refers to the fed's increasing money supply and increasing interest rates to increase real GDP

False

When the Federal reserve increases the money supply people spend more because interest rates fall

false

Under the monetary growth rule proposed by monetarists

the money supply would grow each year at a constant rate equal to the long-run rate of growth of real GDP

Monetarists think that the fed should use

the money supply

when conducting monetary policy fed should target the

the money supply

The supporters of a monetary growth rule believe that active monetary policy

destabilizes the economy, increasing the number of recessions and their severity.

If the Federal Reserve targets the money supply, and the money demand curve shifts to the left, then the Fed

can maintain the money supply target, but at a lower interest rate.

The Federal Reserve does not target both the money supply and an interest rate because

the Fed cannot achieve a target for both the money supply and an interest rate at the same time.

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the federal funds target rate equals the

current inflation rate plus the real equilibrium federal funds rate.

Which of the following statements about inflation targeting is true?

With changes in leadership over time at the Federal Reserve, inflation targeting could help institutionalize good U.S. monetary policy.

A borrower defaults on a loan when he stops making payments on the loan.

True

The larger the fraction of an investment financed by borrowing,

the greater the potential return and potential loss on that investment.

While many analysts defended the actions taken by the Fed and the Treasury to respond to the financial crisis in 2008, others were critical of these actions. The critics were concerned that by not allowing large firms to fail,

there is an increased likelihood that other firms will engage in risky behavior in the future with the expectation that they will also not be allowed to fail.

The Federal Reserve had traditionally made discount loans only to

commercial banks

in response to the financial crisis in 2008 the fed allowed

primary dealers eligible for discount loans

after the financial crisis the fed allowed both

commercial banks and primary dealers eligible for discount loans

To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac

sell bonds to investors and use the funds to purchase mortgages from banks.

A financial asset is considered a security if

it can be sold in a secondary market.

The Federal Reserve cut the federal funds rate seven times between September 2007 and March 2008. What event led the Fed to make these reductions in the federal funds rate?

During this period there was a substantial reduction in the demand for housing.

since 2000, the fed measured inflation using

The personal consumption expenditures index

The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association were established by Congress in order to regulate banks that buy and sell mortgage-backed securities.

False

With the Troubled Asset Relief Program (TARP), the Treasury provided funds to banks in exchange for stock.

True

What Is Monetary Policy?

President and Congress take to manage the money supply and interest rates to pursue their economic objectives

When the Federal Reserve System was established in 1913, its main policy goal was

preventing bank panics

The Federal Reserve two main Monetary policy targets

are the money supply and the interest rate

The money demand curve has a

negative slope because an increase in the interest rate decreases the quantity of money demanded.

An increase in the interest rate causes

a movement up along the money demand curve.

Which of the following would cause the money demand curve to shift to the left?

a decrease in real GDP

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

decrease.

Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should

increase

Which of the following will lead to a decrease in the equilibrium interest rate in the economy?

a decrease in GDP

When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have

more money than they want to hold.

The interest rate that banks charge other banks for overnight loans is the

federal funds rate.

Contractionary monetary policy on the part of the Fed results in

a decrease in the money supply, an increase in interest rates, and a decrease in GDP.

Under the monetary growth rule proposed by the monetarists, the money supply would grow each year at a constant rate equal to the long-run rate of growth of

real GDP.

With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would

not change.

The Federal Reserve cannot target both the money supply and the interest rate because it does not control

money demand.

If the Federal Reserve targets the interest rate and the money demand curve shifts to the left, then the Fed

can maintain the interest rate target, but at a lower quantity of the money supply.

The Taylor rule links the Federal Reserve's target for the

federal funds rate to economic variables.

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the federal funds target rate equals the

current inflation rate plus the real equilibrium federal funds rate.

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is less than potential GDP, then the federal funds target rate will be less than
the sum of the current inflation rate plus the real equilibrium federal funds rate.

...

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