Macro Exam Final (on steroids)

The Fed has set four monetary policy goals that are intended to promote a​ well-functioning economy:

1. Price Stability​ (not low​ prices).

2. High Employment​ (Low Unemployment)

3. Economic Growth

4. Stable Financial Markets.

Who borrows money and who lends money at this​ "target interest​ rate"?

Banks borrow and banks lend.

What is the discount​ rate?

The discount rate is the rate at which the Fed lends to banks

The federal funds rate

is the rate that banks charge each other for overnight loans

The __________ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

When the Fed conducts an open market​ purchase, the Fed

__________ and the money supply increases

buys securities from banks

When the Fed conducts an open market​ purchase, the Fed

buys securities from banks and the money supply ______

increases.

Can the​ Fed, therefore, eliminate​ recessions?

The Fed can only soften the magnitude of​ recessions, not eliminate them

Good timing =

countercyclical policy (smoothing the cycle)

Bad timing =

procyclical effect (worsening the cycle)

What is inflation​ targeting?

Committing the central bank to achieve an announced level of inflation.

Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should​ target?

The Fed should target the money​ supply, not the interest​ rate, and that it should adopt the monetary growth rule.

What two institutions did Congress create in order to increase the availability of mortgages in a secondary​ market?

"Fannie Mae" and​ "Freddie Mac"

How do investment banks differ from commercial​ banks?

Investment banks do not take deposits

Investment banks generally do not lend to households.

Why did the Fed help JP Morgan Chase buy Bear​ Stearns?

Commercial banks would be reluctant to lend to investment banks.

Failure of Bear Stearns would lead to a larger investment bank failure

The U.S. dollar can best be described as

Fiat money

How many federal districts?

12

How many Board of Governor’s members?

7

How long are the board of governors terms?

14-year nonrenewable terms

Board of governors chairmen term length

4 renewable years terms

Very high rates of inflation—in excess of hundreds or thousands of percentage points per year—are known as _____.

hyperinflation

What is a symptom of a high inflation rate?

A high rate of inflation causes money to lose its value so quickly that households and firms avoid holding it.

Which of the following is true with respect to Irving​ Fisher's quantity​ equation,

M x V = P x Y?

V​ = Average number of times a dollar is spent on goods and services

M​ = M1 definition of the money supply

P​ = the GDP deflator

v = P x Y / M

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

One-time tax​ rebates, such as those in 2001 and​ 2008, increase consumption spending by less than a permanent tax cut because​ one-time tax rebates increase

Current income

How does a budget deficit act as an automatic stabilizer and reduce the severity of a​ recession?

Transfer payments to households increase.

During​ recessions, tax obligations fall due to falling wages and profits.

Consumers spend more than they would in the absence of social insurance​ programs, like unemployment.

Increased government debt can lead to higher interest rates​ and, as a​ result, crowding out of private investment spending. In terms of borrowing​ (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the​ economy?

Debt-spending on education

Debt-spending on highways and ports.

Debt-spending on research and development.

When is it considered​ "good policy" for the government to run a budget​ deficit?

When borrowing is used for​ long-lived capital goods.

From an understanding of the multiplier​ process, explain why an increase in the tax rate would decrease the size of the government purchases multiplier.

Part 2

The value of the government purchases multiplier would decrease because in the formula for the multiplier

the MPC is multiplied by​ (1−t).

The three required attributes of money are:

medium of exchange, store of value, and unit of account.

A Whopper costs $4.25, this price represents what function of Money?

Unit of account

The Simple Deposit Multiplier

Is equal to the reciprocal of the required reserve ratio

Explanation: Formula = 1 / reserve ratio.

The Simple Deposit Multiplier assumes:

It assumes no cash is withdrawn and that banks loan out all excess reserves.

The Simple Deposit Multiplier is NOT applicable in the "real world" because

Real-world factors like the Fed targeting interest rates, lagged reserve accounting, and excess reserves reduce the accuracy of the simple model.