Chapter 26 Monetary Policy

When Congress established the Federal Reserve in? 1913, its main responsibility was

Congress broadened the? Fed's responsibility since

Which one of the following is not one of the monetary policy goals of the? Fed?

Which one of the following are the monetary policy goals of the? Fed?

Why is the Fed sometimes said to have a? "dual mandate"? The Fed is said to have? a" dual? mandate" because

How can investment banks be subject to liquidity? problems? Investment banks can be subject to liquidity problems because

What is a banking? panic?

Which of the following best explains how the Federal Reserve acts to help prevent banking? panics?

?"Maximum sustainable? employment" means the economy is producing at its potential where

"Price stability" means

One of the goals of the Federal Reserve is price stability. For the Fed to achieve this? goal,

Which of the following is not one of the monetary policy goals of the Federal Reserve? ("the Fed")?

Which of the following is a monetary policy target used by the? Fed?

The Fed uses policy targets of interest rate? and/or money supply because

What do economists mean by the demand for? money?

What is the advantage of holding? money?

What is the disadvantage of holding? money?

The federal funds rate is

?Additionally, the federal funds rate is

In the graph of the money market shown on the? right, what could cause the money supply curve to shift from MS1 to MS2?? (MS1 shifts to the left to MS2)

In the graph of the money market shown on the? right, what could cause the money demand curve to shift from MD1 to MD2?? (MD1 shifts to the right to MD2)

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

What is the discount? rate?

What is the relationship between the federal funds rate falling and the money supply? increasing?

How does lowering the target for the federal funds rate? "pour money" into the banking? system?

If the Fed would no longer have a specific target for the money? supply, it would be targeting the

The Fed gave up targeting the money supply because

In the figure to the? right, which of the following events is most likely to cause a shift in the money demand? (MD) curve from MD 1 to MD 2 (shifts to the right)?(Point A to Point ?C)??

Which of these variables are the main monetary policy targets of the? Fed?

When interest rates on Treasury bills and other financial assets are? low, the opportunity cost of holding money is? _________, so the quantity of money demanded will be? _________.

If real GDP? increases,

If the price level? decreases,

If the Federal Open Market Committee? (FOMC) decides to increase the money? supply, it orders the trading desk at the Federal Reserve Bank of New York to A. sell stocks. B. sell U.S. Treasury securities. C. buy U.S. Treasury securities. D. buy stocks.

If the FOMC orders the trading desk to sell Treasury? securities,

Suppose that when the Fed decreases the money? supply, households and firms initially hold less money than they want? to, relative to other financial assets. As a? result, households and firms will? _________ Treasury bills and other financial? assets, thereby? _________ their? prices, and? _________ their interest rates.

When the Fed conducts monetary? policy, the most relevant interest rate is the

To affect economic variables such as real GDP or the price? level, the monetary policy target the Federal Reserve has generally focused on is the

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

Which of the following statements is? correct?

An increase in interest rates affects aggregate demand by

As the interest rate? increases,

If the Fed believes the economy is about to fall into? recession, it should

If the Fed believes the inflation rate is about to? increase, it should

What is? "quantitative easing"? Quantitative easing involved the? Fed's

What is? "Operation Twist"? ?"Operation Twist" refers to

Which of the following was the? Fed's objective in using? "quantitative easing" and? "Operation Twist"?

The government would want the economy to contract when real GDP is

"Pushing up the value of the? currency" means

By increasing U.S. interest? rates, the Fed would cause the value of the currency to increase because

An increase in the value of the currency would contribute to a slowdown in the growth of the U.S. economy because

The? short-term interest rate the article is referring to is the

The Fed expects that controlling that one interest rate would allow it to meet its goals for inflation and unemployment because lower? short-term interest rates

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

As interest rates? decline, stocks become a? __________ attractive investment relative to? bonds, which causes the demand for stocks and their prices to? __________.

The? Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called

Why would the Fed intentionally use contractionary monetary policy to reduce real? GDP?

If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to? recover, then

A countercyclical policy is one that

For the Fed to succeed in reducing the severity of business? cycles, it must act precisely when a recession or an acceleration of inflation can be seen in the economic data.

With an expansionary monetary? policy, investment,? consumption, and net exports all? ________, which results in the aggregate demand curve shifting to the? ________, increasing real GDP and the price level.

Which of the following is not a correct comparison between an expansionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply? model?

Which of the following is not a correct comparison between a contractionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply? model? A. In the dynamic? model, contractionary policy would be used when demand grows too? slowly; in the basic? model, expansionary policy would be used when demand increases. B. If the economy is above full? employment, contractionary monetary policy will cause a decrease in the price level in the static but not the dynamic model. C. The static model assumes that potential GDP is constantly growing while the dynamic model assumes that it is static. D. All of the above are correct statements about the two models. E. None of the above are correct statements about the two models.

Explain whether you agree with this? argument: If the Fed actually ever carried out a contractionary monetary? policy, the price level would fall. Because the price level has not fallen in the United States over an entire year since the? 1930s, we can conclude that the Fed has not carried out a contractionary policy since the 1930s.

If the Fed decides to carry out an expansionary monetary policy because it believes aggregate demand will not increase enough to keep the economy at potential? GDP, the inflation rate will most likely be lower than it would have been without the policy.

During? 2005, the FOMC was concerned that the inflation rate would begin to accelerate due to the continued boom in the housing? market, so the Fed started decreasing the target for the federal funds rate.

Consider the following choices and determine the correct definition for the monetary rule.

Milton Friedman would have liked the Fed to follow a monetary rule where the

Support for a monetary rule of the kind advocated by Friedman declined since 1980 because

For more than 20? 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

What is the Taylor? rule?

What is the purpose of the Taylor? rule? The Taylor rule is used to

While Paul Volcker was? chairman, the Fed did not target both the rate of inflation and interest rates because

If the Taylor rule was changed to have a higher coefficient on the output? gap, then during a recession the federal funds rate would be

Economists and policymakers might disagree over the best rule to guide monetary policy because

Which of the following are benefits that the economy might gain from an explicit inflation target even if the target chosen is not a zero rate of? inflation?

August 2017 was the? sixty-fourth consecutive month that the rate of inflation as measured by the core personal consumption expenditures? (PCE) price index was below the Federal? Reserve's target of 2 percent. The consumer price index? (CPI) might yield a rate of inflation different from that found using the core PCE price index because

The choice of the price index the Federal Reserve uses to measure inflation can affect monetary policy because

If the economy moves into? recession, monetarists argue that the Fed should

Which of the following statements is true about the? Fed's monetary policy? targets?

The Taylor rule for federal funds rate targeting does which of the? following?

According to the Taylor? Rule, if the Fed reduces its target for the inflation? rate, the result will be

When the central bank commits to conducting policy in a manner that achieves the goal of holding inflation to a publicly announced? level, it is using

Which of the following were important developments in the mortgage market that took place during the? 1970s?

Beginning in? 2008, the Federal Reserve and the U.S. Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways. Which of the following is one of the unprecedented actions of the? Fed?

Hovnanian was suffering losses because

When the article refers to? "credit availability," it means the ability of

Problems of credit availability would affect a homebuilder such as Hovnanian Enterprises because

What caused this change in the sources of mortgage? finance? What would be the likely consequence of this change for the interest rates borrowers have to pay on? mortgages? The primary reason for this change in the sources of mortgage finance was? _____; the consequence of this change was also? _____ in mortgage rates.

The Federal Reserve releases transcripts of its Federal Open Market Committee? (FOMC) meetings only after a? five-year lag in order to preserve the confidentiality of the discussions. When the transcripts of the? FOMC's 2008 meetings were? released, one member of the Board of Governors was quoted as saying in an April 2008? meeting, "I think it is very possible that we will look back and? say, particularly after the Bear Stearns? episode, that we have turned the corner in terms of the financial? disruption." ?Source: Jon? Hilsenrath, "New View into? Fed's Response to? Crisis," Wall Street Journal?, February? 21, 2014. This? member's analysis turned out to be

The? member's prediction may have seemed reasonable at the time because

In late? 2012, the U.S. Treasury sold the last of the stock it purchased in the insurance company AIG. The Treasury earned a profit on the? $22.7 billion it had invested in AIG in 2008. An article in Wall Street Journal noted? that: ?"This step in? AIG's turnaround, which essentially closes the book on one of the most controversial bailouts of the financial? crisis, seemed nearly unattainable in? 2008, when the? insurer's imminent collapse sent shockwaves through the global? economy." . ?Source: Jeffrey Sparshott and Erik? Holm, "End of a? Bailout: U.S. Sells Last AIG? Shares," New York Times?, December? 11, 2012. The federal government bailed out AIG because

The government bailout was controversial because

Even though the federal government earned a profit on its investment in? AIG, economists and policymakers who opposed the bailout were

What is a? "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? history?

Why would securitization give mortgage borrowers access to a deeper pool of? capital?

In? 2015, Richard? Fuld, the last CEO of Lehman? Brothers, gave a talk in which according to an article in the Wall Street? Journal,? "He outlined what he called the? 'perfect storm' of events that led to the financial? crisis, saying? 'it all started with the? government' and policies that subsidized cheap loans for people to buy homes in order to help them chase the American? dream." ?Source: Maureen? Farrell, "Lehman's Fuld Says It? Wasn't His? Fault," Wall Street Journal?, May? 28, 2015. The events that led to the financial crisis include

Government policies that could have been said to have been subsidizing cheap loans included

Suppose you buy a house for ?$150,000. One year? later, the market price of the house has risen to ?$170,000. If you made a down payment of 20 percent and took out a mortgage loan for the other 80 ?percent, the return on your investment in the house is nothing?%. ?(Enter your response as an? integer.) If you made a down payment of 10 percent and borrowed the other 90 ?percent, the return on your investment in the house is

During the expansion and deflation of the housing? bubble, new home sales rose by

At the beginning of? 2005, Robert? Toll, CEO of Toll? Brothers, argued that the United States was not experiencing a housing bubble.? Instead, he argued that higher house prices reflected restrictions imposed by local governments on building new houses. He argued that the restrictions resulted from ?"NIMBY"long dash—?"Not in My Back ?Yard"long dash—politics. Many existing homeowners are reluctant to see nearby farms and undeveloped land turned into new housing developments. As a? result, according to? Toll, "Towns? don't want anything? built." ?Source: Shawn? Tully, "Toll? Brothers: The New King of the Real Estate? Boom," Fortune?, April? 5, 2005. Why would the factors mentioned by Robert Toll cause housing prices to? rise?

It would be possible to decide whether these factors or a bubble was the cause of rising housing prices by looking at the number of new home units sold. If the number of new home units sold rose noticeably over? time, then the evidence supports the bubble argument.

Which of the following events was an important cause of the 2007-2009 ?recession?

Two ?government-sponsored enterprises that stand between investors and banks that grant mortgages are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

The decline in housing prices that began in 2006 led to rising defaults among which? borrowers?

Which of the following is a monetary policy response to the economic recession of 2007-2009 and the accompanying financial? crisis?