Chapter 25 example #35348

16 December 2022
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question
An asset would be usable as a medium of exchange for all of the following reasons ‚Äčexcept:
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the asset should be a commodity that has intrinsic value.
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Which of the following would be the least desirable candidate to be a good medium of‚Äč exchange?
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milk
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The use of money
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. allows for greater specialization. eliminates the double coincidence of wants. reduces the transaction costs of exchange. ANS: all of the above.
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Money serves as a unit of account when
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prices of goods and services are stated in terms of money.
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Money serves as a standard of deferred payment when
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payments agreed to today but made in the future are in terms of money.
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The Federal Reserve uses two definitions of the money‚Äč supply, M1 and‚Äč M2, because
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M1 is a narrow definition focusing more on‚Äč liquidity, whereas M2 is a broader definition of the money supply.
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Look carefully at the following list. a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The‚Äč traveler's check that you have left over from a trip. e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 definition of the money‚Äč supply?
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c&e
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The M2 definition of the money supply includes
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‚ÄčM1, savings‚Äč accounts, small time‚Äč deposits, and money markets.
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What are the largest asset and the largest liability of a typical‚Äč bank?
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Loans are the largest asset and deposits are the largest liability of a typical bank.
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How do the banks‚Äč "create money"?
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When there is an increase in checking account‚Äč deposits, banks gain reserves and make new‚Äč loans, and the money supply expands.
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Excess reserves
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are reserves banks keep above the legal requirement.
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Suppose the required reserve ratio is 13‚Äč% and a bank has the following balance‚Äč sheet: Assets. Liabilities Reserves $2,400 Deposits $12,000 Loans $9,600 This bank keeps required reserves of ‚Äč$ blank and excess reserves of ‚Äč$ blank
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.13X12,000= ANS1 2,400-ANS= ANS2
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Congress passed legislation to create the Federal Reserve System in 1913 in order to
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end the instability created by bank panics by acting as a lender of last resort.
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The most important role of the Federal Reserve in‚Äč today's U.S. economy is
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controlling the money supply to pursue economic objectives.
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When the Federal Reserve purchases Treasury securities in the open‚Äč market,
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the sellers of such securities deposit the funds in their banks and bank reserves increase.
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When the Federal Reserve sells Treasury securities in the open‚Äč market,
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the buyers of these securities pay for them with checks and bank reserves fall.
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The‚Äč (FOMC) Federal Open Market Committee
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determines the target federal funds rate and the direction of open market operation policies. includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks‚Äč (though not all are voting‚Äč members). makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional bank presidents. ANS: All of the above.
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The Federal Reserve Bank of New York is always a voting member of the FOMC because
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it carries out the policy directives of the FOMC.
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Which of the following is a monetary policy tool used by the Federal Reserve‚Äč Bank?
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Increasing the reserve requirement from 10 percent to 12.5 percent. Buying‚Äč $500 million worth of government‚Äč securities, such as Treasury bills. Decreasing the rate at which banks can borrow money from the Federal Reserve. ANS: All of the above.
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Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money‚Äč supply?
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reserve requirements
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Reserve requirements are changed infrequently because
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banks set‚Äč long-term policy‚Äč decisions, loan‚Äč decisions, and deposit decisions based on the reserve requirement.
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In the securitization‚Äč process,
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banks grant loans to households and bundle the loans into securities that are then sold to investors.
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In addition to the Federal Reserve‚Äč Bank, what other economic actors influence the money‚Äč supply?
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‚ÄčHouseholds, firms, and banks.
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If the money supply is growing at a rate of 6 percent per‚Äč year, real GDP‚Äč (real output) is growing at a rate of 0 percent per‚Äč year, and velocity is‚Äč constant, what will the inflation rate‚Äč be? If the money supply is growing at a rate of 6 percent per‚Äč year, real GDP‚Äč (real output) is growing at a rate of 0 percent per‚Äč year, and velocity is growing at 3 percent per year instead of remaining‚Äč constant, what will the inflation rate‚Äč be?
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6 6+3=9
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Which of the following is true with respect to Irving‚Äč Fisher's quantity‚Äč equation, M*V=P*Y
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V=P*Y/M P= the GDP deflator V= Average number of times a dollar is spend on goods and services M= M1 definition of the money sully ANS: All of the above.
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The average number of times each dollar in the money supply is used to purchase goods and services is called
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the velocity of money.
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Evidence shows that the quantity equation is correct over the long‚Äč run, which implies that the
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growth rate of the money supply determines the rate of inflation.
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According to the quantity theory of money inflation results from which of the‚Äč following?
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The money supply grows faster than real GDP.
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What is a banking‚Äč panic?
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A situation in which many banks experience runs at the same time.
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Which of the following best explains how the Federal Reserve acts to help prevent banking‚Äč panics?
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The Fed acts as a lender of last‚Äč resort, making loans to banks so that they can pay off depositors.
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Which of the following is NOT a monetary policy goal of the Federal Reserve bank‚Äč (the Fed)?
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Low prices
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The Federal Reserve has multiple economic goals for monetary policy to‚Äč achieve, ‚Äč However, it can be difficult to manage all of the goals at once. Which of the following is not true regarding the multiple goals of the‚Äč Fed?
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The goal of financial market stability means that the Fed tries to ensure that asset‚Äč prices, such as stock‚Äč prices, increase at a very high rate so investors can make more money.
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Which of the following is a monetary policy target used by the‚Äč Fed?
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Interest rate.
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The Fed uses policy targets of interest rate‚Äč and/or money supply because
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it can affect the interest rate and the money supply directly and these in turn can affect‚Äč unemployment, GDP‚Äč growth, and the price level.
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The federal funds rate is
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the interest rate that banks charge each other for overnight loans.
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‚ÄčAdditionally, the federal funds rate is
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very important for the‚Äč Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.
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In the graph of the money market shown on the‚Äč right, what could cause the money supply curve to shift from MS1 to MS2‚Äč?
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The Fed decreases the money supply by deciding to sell U.S. Treasury securities.
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In the graph of the money market shown on the‚Äč right, what could cause the money demand curve to shift from MD1 to MD2‚Äč?
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An increase in real GDP. An increase in the price level
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When the Federal Reserve increases the required reserve ratio as a part of a contractionary monetary‚Äč policy, there‚Äč is:
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A decrease in the money supply and an increase in the interest rate.
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If the Fed believes the economy is about to fall into‚Äč recession, it should
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use an expansionary monetary policy to lower the interest rate and shift AD to the right.
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If the Fed believes the inflation rate is about to‚Äč increase, it should
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use a contractionary monetary policy to increase the interest rate and shift AD to the left.
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Consider the following‚Äč statement: ‚Äč"In the dynamic AD and AS‚Äč model, contractionary monetary policy causes the price level to‚Äč fall." The statement is
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False. Contractionary policy causes the price level to rise by less than it would have without the policy.
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For more than 20‚Äč years, the Fed has used the federal funds rate as its monetary policy target. It has not targeted money supply at the same time because the
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Fed cannot target both at the same‚Äč time: It has to choose between targeting an interest rate and targeting the money supply.
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What is inflation‚Äč targeting?
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Committing the central bank to achieve an announced level of inflation.
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Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should‚Äč target?
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The Fed should target the money‚Äč supply, not the interest‚Äč rate, and that it should adopt the monetary growth rule.
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Recall that‚Äč "securitization" is the process of turning a‚Äč loan, such as a‚Äč mortgage, into a bond that can be bought and sold in secondary markets. An article in the Economist ‚Äčnotes: That securitization caused more subprime mortgages to be written is not in doubt. By offering access to a much deeper pool of‚Äč capital, securitization helped to bring down the cost of mortgages and made‚Äč home-ownership more affordable for borrowers with poor credit histories. ‚ÄčSource: "Ruptured‚Äč Credit," Economist‚Äč, May‚Äč 15, 2008. What is a‚Äč "subprime mortgage," and would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit‚Äč history?
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Loans granted to borrowers with flawed credit‚Äč histories; a higher interest rate.
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Why would securitization give mortgage borrowers access to a deeper pool of‚Äč capital?
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Since banks could resell mortgages to‚Äč investors, they had access to more funds than just their own deposits.
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In‚Äč 2015, Richard‚Äč Fuld, the last CEO of Lehman‚Äč Brothers, gave a talk in which according to an article in the Wall Street‚Äč Journal,‚Äč "He outlined what he called the‚Äč 'perfect storm' of events that led to the financial‚Äč crisis, saying‚Äč 'it all started with the‚Äč government' and policies that subsidized cheap loans for people to buy homes in order to help them chase the American‚Äč dream." ‚ÄčSource: Maureen‚Äč Farrell, "Lehman's Fuld Says It‚Äč Wasn't His‚Äč Fault," Wall Street Journal‚Äč, May‚Äč 28, 2015. The events that led to the financial crisis include
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a burst in a housing bubble in 2006 which led to mortgagea ‚Äč defaults, and a disruption of the financial system resulting from the creation of complex packagings of mortgages.
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Government policies that could have been said to have been subsidizing cheap loans included
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the creation of a secondary mortgage market through Fannie Mae and Freddie‚Äč Mac, and the low interest rates following the 2001 recession.
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The introduction of Fannie Mae and Freddie Mac into the‚Äč mortgage-backed securities market by the government
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allowed the secondary mortgage market to expand greatly by getting funds from investors and using them to purchase mortgages from banks.al assisted in separating mortgage loans from‚Äč credit-worthiness standards because banks could sell the loans to Fannie Mae and Freddie Mac instead of keeping them on their balance sheets. created additional moral hazard problems as banks could make riskier loans because they could simply sell loans to Fannie Mae and Freddie Mac as soon as the loans were made. ANS:All of the above.
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Which of the following is a monetary policy response to the economic recession of 2007dash2009 and the accompanying financial‚Äč crisis?
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The Fed purchased large amounts of‚Äč mortgage-backed securities. The Fed provided loans directly to corporations by purchasing commercial paper. The Fed expanded the eligibility for discount loans to firms other than commercial banks. ANS: All of the above were responses.
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What is fiscal‚Äč policy?
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Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
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Who is responsible for fiscal‚Äč policy?
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The federal government controls fiscal policy.
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Government spending and taxes that increase or decrease without any actions taken by the government are referred to as
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automatic stabilizers.
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Which of the following are examples of discretionary fiscal‚Äč policy? ‚Äč(Check all that‚Äč apply.)
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The government provides stimulus funds to repair roads and bridges to increase spending in the economy. The president and Congress reduce tax rates to increase the amount of investment spending. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate.
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Which of the following are categories of federal government‚Äč expenditures?
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transfer payments interest on the national debt grants to state and local governments ANS: All of the above.
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The largest and‚Äč fastest-growing category of federal expenditures is
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transfer payments.
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The federal‚Äč government's day-to-day activities include running federal agencies like the Environmental Protection‚Äč Agency, the‚Äč FBI, the National Park‚Äč Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up
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less than 10 percent of federal government expenditures.
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If Congress and the president decide an expansionary fiscal policy is‚Äč necessary, what changes should they make in government spending or‚Äč taxes?
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In this‚Äč case, Congress and the president should enact policies that increase government spending and decrease taxes.
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What changes should they make if they decide a contractionary fiscal policy is‚Äč necessary?
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In this‚Äč case, Congress and the president should enact policies that decrease government spending and increase taxes.
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Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not‚Äč increase?
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‚ÄčYes, because fiscal policy and monetary policy are separate things.
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Why does a‚Äč $1 increase in government purchases lead to more than a‚Äč $1 increase in income and‚Äč spending?
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Through the government purchases‚Äč multiplier, the‚Äč $1 increase in government spending will lead to an increase in aggregate demand and national‚Äč income, which will lead to an increase in induced spending.
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Consider the following‚Äč statement: ‚Äč"Real GDP is currently‚Äč $17.7 trillion, and potential real GDP is‚Äč $17.4 trillion. If Congress and the president would decrease government purchases by‚Äč $300 billion or increase taxes by‚Äč $300 billion, the economy could be brought to equilibrium at potential‚Äč GDP." If government purchases were to decrease by‚Äč $300 billion or if taxes were increased by‚Äč $300 billion, the equilibrium level of real GDP would decrease by
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more than‚Äč $300 billion. Therefore, the statement above is incorrect
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Which can be changed more‚Äč quickly: monetary policy or fiscal‚Äč policy?
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Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.
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What is meant by crowding‚Äč out?
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Crowding out is a decline in private expenditures as a result of increases in government purchases.
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Which of the following best describes the difference between crowding out in the short run and in the long‚Äč run?
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In the short‚Äč run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long‚Äč run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.
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What is the difference between the federal budget deficit and federal government‚Äč debt?
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The federal budget deficit is the‚Äč year-to-year short fall in tax revenues relative to government spending ‚Äč (T < G‚Äč + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.
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How does a budget deficit act as an automatic stabilizer and reduce the severity of a‚Äč recession?
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Consumers spend more than they would in the absence of social insurance‚Äč programs, like unemployment. Transfer payments to households increase. During‚Äč recessions, tax obligations fall due to falling wages and profits. ANS: All of the above.
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When actual GDP is below potential GDP the budget deficit increases because‚Äč of:
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an increase in transfer payments and a decrease in tax revenues.
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If the government increases expenditure without raising‚Äč taxes, this will
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-increase the budget deficit and require the government to borrow additional funds. -cause the interest rate to‚Äč increase, thereby, reducing private investment and crowding out the private sector.
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The national debt is best measured as
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the total value of U.S. Treasury securities outstanding.
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It would seem that both households and businesses would benefit if the federal income tax were simpler and tax forms were easier to fill out. ‚ÄčHowever, tax laws have become increasingly complicated because
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the tax laws are used to encourage certain activities and discourage others.
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Suppose a political candidate hired you to develop two arguments in favor of a flat tax. Consider the following list of arguments about changing to a flat‚Äč tax: A. There would be a reduction in paperwork and the compliance cost of the tax system. B. The complexities in the current tax code allow the government to pursue other policy goals. C. A change in the tax code would result in a more unequal distribution of income because the marginal tax rate on‚Äč high-income taxpayers would be reduced. D. There are potential increases in labor‚Äč supply, savings, and investment from a lower marginal tax rate. Which two out of the above list of arguments would you advance in favor of a flat‚Äč tax?
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A&D
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Consider the same list of arguments about changing to a flat tax. Which two out of the above list of arguments would you advance against a flat‚Äč tax?
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B&C