Exam3 17-18, 20-21 Flashcards
Central bank liabilities? (3)
Currency, government accounts, reserves
How does the fed control the quantity of securities they hold?
Through open market operations
Reserves are what for commercial banks and what for central banks?
Assets; liabilities
What do commercial banks reserves consist of?
Cash in the banks own vault and deposits at the fed
What is the monetary base also known as?
High powered money
A withdraw by a person does what to the Feds balance sheet?
No change in total assets or total liabilities,
An increase in the liability of currency and decrease in the liability of reserves by the amount of the withdraw
During early years of the Great Depression a study of the money aggregates reveals that the money multiplier did what?
Decreased
What is the focus of central banks today?
Interest rates
The fed offers discount lending as what?
Lender of last resort
Most central banks provide discount loans at what type of rate?
One above the target interest rate
What is the primary policy instrument of the FOMC?
The target federal funds rate
What would the fed do if the market fed funds rate went above the target?
Purchase US treasury securities
If current market fed funds rate = target rate and the demand for reserves decreases, what is the likely response in the fed funds market?
Market fed funds rate will decrease
Three types of loans the fed makes?
Primary, secondary, seasonal
Primary credit extended by the fed is what? (2)
Short-term & overnight
Are reserve requirements a direct tool of monetary policy today?
No
Can central banks set a quantity and price tool simultaneously?
No
When the fed targeted bank reserves as monetary policy tool from 1979-1982 what happened?
Interest rates rose very high
An increase in reserve demand would do what to the fed funds rate?
Increase it.
Decrease in reserve demand would decrease it
If reserve demand is volatile, in order for the central bank to keep interest rates from being volatile it must do what?
Let quantity of reserves fluctuate
Taylor rule equation?
Target fed funds rate = 2+current inflation + 1/2(inflation gap) + 1/2(output gap)
What does the quantity theory of money state?
Changes in the aggregate price level are caused solely by changes in the quantity of money
In long run, if ignore changes in velocity what will inflation do?
Equal money growth - growth in potential output
What happens during a recessionary gap?
Current output is below potential output
What happens during an expansionary gap?
Current output is above potential output
What would the monetary policy reaction curve do as result of policy makers increasing the inflation target?
MPRC would shift to the right
The relationship between inflation and real output is what?
Inverse
How do central bankers respond to higher rates of inflation?
By increasing the real interest rate
Decrease in the inflation target would do what to the dynamic aggregate demand curve?
Shift left
If policy makers fear an imminent recession because of pessimism of business people what would they do to avoid?
Shift MPRC right
The short run aggregate supply curve is what?
Upward sloping
If current output level rises above potential output level, what would the short-run aggregate supply curve do over time?
Shift left
What makes output gaps occur(besides CO not equaling PO🙄)?
aggregate demand equals short run aggregate supply but not long run aggregate supply
What affect does an expected higher price level (inflation) have on short run aggregate supply?
Shifts left
Increase in aggregate demand would have what short run effect?
Increase in current inflation rate
Open market purchase of bonds by the fed will cause what in the long run for real GDP and aggregate price level?
No change in GDP and increase in aggregate price level
If a recession were the result of monetary policy, we should observe what happen?
Interest rates rising as output falls
Since every recession was preceded by rising interest rates, what does this suggest about them?
They were caused by the actions of the fed
Central bank assets? (3)
Securities, foreign exchange reserves, loans
if current output level drops below potential level of output, the SRAS curve will do what over time?
shift right
what does a negative supply shock cause SRAS to do?
decrease
what will an appreciation of the US dollar cause real GDP to do in the short run? what about inflation?
GDP & inflation decreases
where can the point be found where target inflation is consistent with the long-run real interest rate?
MPRC!
on the MPRC, rate is x-axis, inflation is y-axis
a negative supply shock accommodated by an open market purchase by the fed will cause what to happen to GDP and inflation in the long run?
no change in GDP, increase in inflation
at any point along the long run aggregate supply curve, current output equals ___ and expected inflation equals ___
potential output; current inflation
open market sale of bonds by the fed would cause what to happen to GDP and inflation in the short run?
decrease GDP and inflation
what happens to the MPRC if the fed increases or decreases the target inflation rate?
increase target inflation (decreases target int rate), MPRC shifts right. decrease target inflation (increases target int rate), MPRC shifts left
if recession feared due to increased pessimism of business people, how would policymakers avoid recession?
shift MPRC to the right!
if a recession were the result of monetary policy we should observe what happen?
interest rates rising, output falling
when output is below the natural rate level, what happens to wages and inflation and the SRAS curve?
wages fall, inflation decreases, SRAS curve shifts left (decreases)
what would a decrease in taxes cause? what about an increase?
cut taxes – ^C – ^AE – ^AD (shifts right)
^taxes – decrease C – decrease AE – decrease AD (shifts left)
what does the quantity theory of money explain?
the higher the level of real money growth,the lower the level of inflation will be
economy is in both a short and long run equilibrium if current inflation equals what and current output equals what?
current inflation = expected inflation & current output = potential output
an increase in aggregate demand (from an open market purchase of the fed) has what short run effects?
increase in current inflation rate
what shift on what curve causes stagflation?
leftward shift on SRAS
based on the equation of exchange, what does the quantity theory of money state?
changes in aggregate price level caused solely by changes in quantity of money
what are effects on cost of production and SRAS curve when workers receive higher wages?
cost of production ^^ and SRAS shifts left
what are the wealth effect, interest rate affect, and exchange rate effect explanations for?
the slope of the aggregate demand curve (why it slopes downward)
the wealth effect?
inflation rises, real wealth goes down, so C goes down, so AD decreases
interest rate effect?
inflation rises, demand for money rises, so selling bonds rises, supply of bonds rises, price of bonds falls, so real rate rises, investing falls, AD falls
exchange rate effect?
inflation rises, real rate rises, foreigners demand more US bonds, demand for US dollar rises, exchange rate rises, US goods become expensive, exports go down, imports rise, NX down, so AD down
the two shifters of aggregate demand curve?
any event that changes MPRC or aggregate expenditures would cause AD curve to shift
what causes changes in aggregate expenditures? (4)
consumption, investment, government spending, NX
3 things that cause changes in consumption?
change in stock market (crash or boom), change in taxes (cut or rise), change in consumer confidence (optimistic or pessimistic)
2 things that cause changes in investment?
business confidence, investment tax credit
2 things that cause changes in net exports?
exchange rates, economic fluctuations abroad (recession abroad lowers NX, expansion abroad rises NX)
2 things that cause changes in MPRC?
change in target inflation(rise then AD rises) or target real interest rate (rise than AD falls)
what are shifters of the SRAS curve? (any event that causes changes in what?)
any event that causes changes in cost of production
2 things that cause changes in cost of production?
change in oil prices, change in expected inflation(prices) – inflation rises, wages rise, costs rise, SRAS decreases
what monetary and fiscal policy actions take place during recessions?
must ^AD so ^money supply buy buying bonds(monetary); ^G and lower T(fiscal)
what makes recessionary gaps happen?
AD or SRAS shift left
velocity of money is what in the short run and what in the long run?
volatile in short run, constant in long run
