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74 terms

Macro Final

STUDY
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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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