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Econ 2035 Final Exam Study Cards
N/A
71
Economics
Undergraduate 3
12/01/2012
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Term

From the quantity equation of money we can derive inflation as ______. In the long run, the two variables outside the influence of the Fed are _________ 

 

 Definition

inflation= %change in M + %change in V - %change in Y

 

 

inflation and output growth

 
Term
Which if the following equation is Okuns Law?
 Definition

Y - Y*/ Y* = -2(U-U*)

 
Term
According tho the Talyor Rule, the Fed should _____ interest rates when inflation rises above its target rate, and  ______interest rates when output falls below its potential 
 Definition

INCREASE

 

 

 

 

DECREASE

 
Term

The Principle that monetary policy can NOT permantently impact real variable is caled ________________

 

 Definition
LONG RUN MONEY NEUTRALITY 
Term
Suppose the economy is producing at the potential level of output. Further assume that there is a substantial fall in stock prices. Everything else held consant, the fall in stock prices will cause real aggregate output to _____ in the short run and the inflation rate to _______ in the short run
 Definition

DECREASE

 

 

 

 

 

DECREASE
Term

The federal reserve has an explicit inflation target range of 2 - 2.5%? 

 

 

 

TRUE OR FALSE 

 Definition

 

 

FALSE

 
Term
In times of deflation, the ex ante real interest rate is _______ than the ex post real interest rate
 Definition

 

 

GREATER THAN
Term
If output is below potential output at a nominal interest rate of zero, a central bank _______ effectively conduct __________
 Definition

CANNOT

 

 

MONETARY POLICY
Term
THE TWO PILLARS OF THE ECB'S POLICIES ARE ________AND _________
 Definition

INFLATION FORECASTS

 

AND 

 

 

MONEY GROWTH 
Term

Suppose a legislative mandate requires that at least 10% of gasoline sold in the United States be mixed with ethanol made from corn went into effect. Further assume that corn is a major ingredient in many types of food based intermediate goods used in production. Everything else held constant, this legislation would cause 

a ________ supply shock and the inflation rate would ________

 Definition
  1. ADVERSE
  2. INCREASE
Term
Using the notation on the text, the after-tax real interest rate is written as___________
 Definition
  1. ȓ = (1 – τ)r – τπ
Term
Monetary policy is considered time-inconsistent because_________________ 
 Definition

policymakers are tempted to pursue discretionary policy that is more expansionary in the short run. 
Term
Under a gold standard, the main determinant for money growth was________ 
 Definition
MINING TECHNOLOGY
Term
___________is the provision that the Fed give clear and detailed information about monetary policy
 Definition
TRANSPARENCY
Term

If the economy is in recession, then the output gap is______

 

 Definition
NEGATIVE
Term
Suppose that a country’s central bank targets the level of the money supply. Further assume that the country enters a severe recession. In the context of the liquidity preference model and everything else held constant, this will cause money _____ to __________ amd nominal interest rates will _________
 Definition
  1. Demand 
  2. Decrease
  3. Fall
Term
The decision by inflation targeters to choose inflation targets _____ zero reflects the concern of monetary policymakers that particularly _____ inflation can have substantial negative effects on real economic activity.     
 Definition
  1. Above 
  2. Low
Term
Everything else held constant, if bond traders fell that an economy is sliding into recession, then bond prices will ______ in anticipation of a federal rate _______
 Definition
  1. increase
  2. decrease
Term
Suppose the U.S. economy is producing at the potential level of output. Further assume that the U.S. Congress passes and the Presidential signs a bill that significantly increases government spending. Everything else held constant, if the Federal Reserve is following accommodative policy, then the real interest rate will ________ and the inflation rate will _______
 Definition
  1. not be changed 
  2. increase
Term
Suppose the Federal Reserve decreases the federal funds rate. Everything else held constant, which of the following represents a channel of the monetary transmission mechanism?
 Definition

 A decrease in the federal funds rate will cause the exchange rate to depreciate, which causes net exports to increase, thus aggregate output will increase.


Term
Suppose the U.S. economy is currently producing at the potential level of output. Further assume that there is a shift in foreign consumers’ preferences towards U.S. produced goods everything else held constant, the Fed will ______ the real interest rate in order to keep aggregate output at potential. If the Fed does nothing, aggregate output will ______
 Definition
  1. increase
  2. increase
Term
Assuming there are no empty slots on the Board of Governors, the FOMC has _____ members: the _____ members of the Board of Governors and the presidents of _____ of the Federal Reserve Banks. 
 Definition
  1. 12
  2. 7
  3. 5
Term
Suppose the economy in the year 2010 is producing at the potential level of output and the government increases its spending in 2011, but in 2012 brings its spending back down to the 2010 level. Further assume that the central bank wants to keep the inflation rate at its current level. Everything else held constant, according to the AE/PC model with time lags, which of the following will happen? 
 Definition

          The central bank raises the real interest rate in 2011 and lowers the rate in 2012 to its 2010 level, aggregate output increases above potential in 2011, decreases to below potential in 2012, and returns to potential level in 2013, and the inflation rate stays constant in 2011, increases in 2012, but returns to 2010 level in 2013. 
Term
Suppose the target rate of inflation is 2%, the economy’s output gap is 1.0%, the neutral real interest rate is 2.5%, the current inflation rate is 3.0% and the Taylor rule coefficients are aY = aπ = 0.5. According to the Taylor rule, what real interest rate should the Fed choose? 
 Definition

3.5%      

  


because


r = r n +ayẎ + Aπ(π–πT)à r = 2.5 + 0.5(1) +0.5(1) = 3.5
Term
Suppose the inflation rate is at 0% and an adverse expenditure shock occurs. Everything else held constant, according to the AE/PC model, this would cause the inflation rate to _____; the real interest rate to ______ and potentially cause a _______.
 Definition
  1. decrease
  2. increase
  3. liquidity trap
Term
When the Fed raises the federal funds rate by 2% for every 1% increase in the inflation rate, this is an example of: _______ 
 Definition
a monetary policy
Term
Suppose that the U.S. economy is producing at the potential level of output and the Federal Reserve has overestimated the effect of the real interest rate on real aggregate output. Further assume that there is an adverse expenditure shock and the Federal reserve wants to keep real aggregate output at potential. Everything else held constant, according to the AE/PC model, the Federal Reserve will ______the real interest rate and real aggregate output will _______
 Definition
  1. Decrease
  2. Decrease
Term
Of the five time lags that prevent economic policy from returning real aggregate output to the potential level instantaneously, two do not slow the effectiveness of monetary policy significantly, the __________and _______ lags. 
 Definition
  1. LEGISLATIVE
  2. IMPLEMENTATION 
Term
     Everything else held constant, an increase in the time deposit ratio will result in ______  in the M1 money multiplier and ________ in the M2 money multiplier. 
 Definition
       Everything else held constant, an increase in the time deposit ratio will result in NO CHANGE  in the M1 money multiplier and INCREASE in the M2 money multiplier. 
Term
Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a________open market _______, everything else held constant
 Definition

Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ­DEFENSIVE open market PURCHASE, everything else held constant     
Term
As of right now, the Federal Reserve’s target for the federal funds rate is  a range between ____________
 Definition
As of right now, the Federal Reserve’s target for the federal funds rate is  a range between 0.00 and 0.25 percent
Term

Compared to the Federal Reserve, the European Central Bank is less transparent because   

 Definition
The Federal Reserve publicly releases the minutes 3 weeks after the meetings while the European Central Bank waits 20 years to publicly release its minutes
Term

       The two most important categories of assets on the Fed’s balance sheet are ________ and ________ because they earn interest. 

 Definition

  The two most important categories of assets on the Fed’s balance sheet are SECURITIES and DISCOUNT LOANS because they earn interest. 
Term
Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system ________ and the monetary base _________
 Definition
Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system REMAIN UNCHANGED and the monetary base REMAINS UNCHANGED
Term

  Suppose the Bank of China permanently decreases its purchases of U.S. government bonds and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant, a open market ______would be the appropriate monetary action for the Fed to take to offset the expected ______ in the monetary base in the United States. 

 Definition

     Suppose the Bank of China permanently decreases its purchases of U.S. government bonds and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant, a open market PURCHASE would be the appropriate monetary action for the Fed to take to offset the expected DECREASE in the monetary base in the United States. 
Term

       Which of the following in not an element of inflation targeting?

A.      A public announcement of medium-term numerical targets for inflation

B.      Increased accountability of the central bank for attaining its inflation objectives

C.      An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy

D.      An institutional commitment to price stability as the primary long-run goal 

 Definition

       Which of the following in not an element of inflation targeting?

A.      A public announcement of medium-term numerical targets for inflation

B.      Increased accountability of the central bank for attaining its inflation objectives

C.      An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy

D.      An institutional commitment to price stability as the primary long-run goal 
Term
Everything else held constant, an increase in the excess reserve ratio will mean a ________ in the M1 money multiplier 
 Definition
Everything else held constant, an increase in the excess reserve ratio will mean a DECREASE in the M1 money multiplier 
Term
Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in Memphis discovers a painting of Elvis that used to grace the walls of the conference room. Suppose further that, at a public auction, the bank sells the painting for $19.95. This sale will cause__________ in the monetary base, everything else held constant
 Definition
Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in Memphis discovers a painting of Elvis that used to grace the walls of the conference room. Suppose further that, at a public auction, the bank sells the painting for $19.95. This sale will cause a decrease of $19.95 in the monetary base, everything else held constant
Term
The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule
 Definition
The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the INFLATION RATE will be higher, compared to policy makers following a behavior rule
Term

Everything else held constant, an increase in the interest rate paid on checkable deposits will cause an ____ in the amount of checkable deposits held relative to currency holdings and a ______ in the currency ratio. 

 Definition

       Everything else held constant, an increase in the interest rate paid on checkable deposits will cause an INCREASE in the amount of checkable deposits held relative to currency holdings and a DECREASE in the currency ratio. 
Term
The monetary policy strategy that suffers a lack of transparency is________
 Definition
The monetary policy strategy that suffers a lack of transparency is THE IMPLICT NOMINAL ANCHOR
Term

       Everything else held constant, an increase in wealth will cause the holdings of checkable deposits to the holdings of currency to ______ and the currency ratio to _______.

 Definition

       Everything else held constant, an increase in wealth will cause the holdings of checkable deposits to the holdings of currency to INCREASE and the currency ratio to DECREASE.
Term
Each governor on the Board of Governors can serve _____________
 Definition
each governor on the Board of Governors can serve one full nonrenewable fourteen-year term plus part of another term.
Term
Regarding central bank independence the European Central Bank is _______ independent to/than the Fed.
 Definition
Regarding central bank independence the European Central Bank is more independent than the Fed.
Term

      Which of the following created the Board of Governors of the Federal Reserve System? 

 Definition

   Which of the following created the Board of Governors of the Federal Reserve System? The Banking Act of 1935
Term

In the market of reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is 

________ sloped 

 Definition
In the market of reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is NEGATIVELY SLOPED
Term
The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that a ____________  was needed to prevent future panics 
 Definition
financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that a central bank was needed to prevent future panics
Term
Each Fed bank president attends FOMC meetings; although only ____ Fed bank presidents vote on policy, all ____ provide input. 
 Definition
Each Fed bank president attends FOMC meetings; although only FIVE Fed bank presidents vote on policy, all TWELVE provide input. 
Term
During the end of the year holiday season, depositors typically withdraw more currency from their accounts. This implies that the money multiplier ________  during the end of the year holiday season
 Definition
During the end of the year holiday season, depositors typically withdraw more currency from their accounts. This implies that the money multiplier falls during the end of the year holiday season
Term
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserves ratio of _____percent
 Definition
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserves ratio of TEN percent
Term
When the Federal Reserve calls in a discount loan from a bank, the monetary base _____ and reserves______
 Definition
When the Federal Reserve calls in a discount loan from a bank, the monetary base DECREASE and reserves REMAIN UNCHANGED.
Term
According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ______ the Fed’s inflation target or when real GDP _______the Fed’s output target
 Definition
According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation RISES ABOVE the Fed’s inflation target or when real GDP RISES ABOVE the Fed’s output target
Term
In the sample deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by __________
 Definition
In the sample deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by $100 TIMES THE REQUIRED RESERVE RATIO. 
Term
  1. Which of the following is NOT an advantage of inflation targeting?
    1. There is an immediate signal on the achievement of target.
    2. Inflation targeting reduces the effects of inflation shocks
    3. Inflation targeting does not rely on stable money-inflation relationship
    4. There is simplicity and clarity of the target 
 Definition
  1. Which of the following is NOT an advantage of inflation targeting?
    1. There is an immediate signal on the achievement of target.
    2. Inflation targeting reduces the effects of inflation shocks
    3. Inflation targeting does not rely on stable money-inflation relationship
    4. There is simplicity and clarity of the target 
Term
If Treasury deposits at the Fed are predicted to decrease, the manager of the trading desk at the New York Fed bank will likely conduct ______ open market operations to _______ reserves
 Definition
If Treasury deposits at the Fed are predicted to decrease, the manager of the trading desk at the New York Fed bank will likely conduct DEFENSIVE open market operations to DRAIN reserves
Term

Assume that the labor force and the productivity of the labor force are both growing at a constant rate. If the unemployment rate is to remain constant at its level, which of the following statements must be true?

  1. Growth in real GDP is greater than growth in productivity
  2. Growth in real GDP is the same as the growth in productivity
  3. Growth in real GDP is less than than growth in productivity
  4. Growth in real GDP and growth in productivity are unaffected by unemploymnet
 Definition

Assume that the labor force and the productivity of the labor force are both growing at a constant rate. If the unemployment rate is to remain constant at its level, which of the following statements must be true?

  1. Growth in real GDP is greater than growth in productivity
  2. Growth in real GDP is the same as the growth in productivity
  3. Growth in real GDP is less than than growth in productivity
  4. Growth in real GDP and growth in productivity are unaffected by unemploymnet
Term
If a member of a non-bank public purchases a government bond from the Federal Reserve with currency, the monetary base will____, but reserves will _______
 Definition
If a member of a non-bank public purchases a government bond from the Federal Reserve with currency, the monetary base will FALL, but reserves will REMAIN UNCHANGED
Term

In the channel-corridor system: __________

 

 Definition
In the channel-corridor system monetary control can be exercised with no required reserves
Term
If the desired intermediate target is an interest rate, the preferred policy instrument would be___________
 Definition
If the desired intermediate target is an interest rate, the preferred policy instrument would be the federal funds rate
Term
In practice, the Fed’s policy of targeting_________ in the 1960s proved to be _______  ; destabilizing the economy. 
 Definition
In practice, the Fed’s policy of targeting MONETARY AGGREGATES in the 1960s proved to be PROCYCLICAL destabilizing the economy. 
Term
The charter for the First Bank of the United States was/wasn't renewed because congress succeded/failed to renew because of a single vote
 Definition
The charter for the First Bank of the United States was not renewed because Congress failed to renew the charter by a single vote. 
Term
The National bank Act of 1863 created which of the following financial regulatory agencies?
 Definition
The National bank Act of 1863 created which of the following financial regulatory agencies? The Office of the Comptroller of the Currency (OCC)
Term
The increase in the availability of ATM’s has caused the cost of acquiring currency to _____ which will cause the currency ratio to ______, everything else held constant
 Definition
The increase in the availability of ATM’s has caused the cost of acquiring currency to DECREASE which will cause the currency ratio to INCREASE, everything else held constant
Term
The primary reason for the creation of the Federal Reserve System was desire to ___________
 Definition
The primary reason for the creation of the Federal Reserve System was desire to have a lender of last resort
Term
The amount of borrowed reserve is_________ related to the discount rate, and is _________ related to the market interest rate,
 Definition
The amount of borrowed reserve is NEGATIVELY related to the discount rate, and is POSITIVELY related to the market interest rate
Term
Monetary policy strategy that provides the least accountability is ___________
 Definition
Monetary policy strategy that provides the least accountability is MONETARY TARGETING
Term
The four players in the money supply process include_____,_____,____,and _____
 Definition
The four players in the money supply process include banks, depositors, the central bank, and borrowers
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