Midterm 2 Test 3 Chapters 24-30

Question 1

Financial sector

Answer 1

• facilitates the running of the real economy

* the economy cannot function without it

Question 2

Asset price bubble

Answer 2

Unsustainable rapidly rising prices of some type of asset such as stocks or houses

Question 3

Five unconventional monetary policy tools are:

Answer 3

1. Quantitative easing
2. Credit easing
3. Operation twist
4. Pre commitment policy
5. Negative interest rates

Question 4

4. Precommitment policy

Answer 4

Committing to continue a policy for a prolonged period of time

Question 5

Negative interest rate because of inflation

Answer 5

4 percent inflation and 1 percent nominal interest rate is a 3 percent real interest rate

Question 6

Unconventional monetary policy helps when?

Answer 6

In the short run

Question 7

Monetary policy

Answer 7

Is a policy of influencing the economy through changes in the banking systems reserves that influence the money supply credit availability and interest rates in the economy

Question 8

Who is monetary policy controlled by ?

Answer 8

The central bank

Question 9

Who is fiscal policy controlled by ?

Answer 9

The government directly

Question 10

Nominal income

Answer 10

Income in cash unadjusted for inflation

Question 11

Long term effect of expansionary monetary policy when economy is above potential

Answer 11

Increase price level

Question 12

Real income =

Answer 12

Nominal income - price level

Question 13

Expansionary monetary policy increases what?

Answer 13

Nominal income

Question 14

How does monetary policy affect aggregate demand?

Answer 14

Indirectly by changing short term and long term interest rates

Question 15

Expansionary monetary policy: what happens when the fed increases reserves in the banking system?

Answer 15

Banks have an incentive to lower interest rates

Question 16

Expansionary monetary policy summarized

Answer 16

Increase money supply and decreases interest rate

Increases both investment and output

Question 17

Contractionary monetary policy summarized

Answer 17

Decreases money supply and increases the interest rate

Decreases both investment and output

Question 18

What group of the fed decides monetary policy?

Answer 18

Federal open market committee (FOMC)

Question 19

Duties of the fed

Answer 19

1. Conducting monetary policy (influencing the supply of money and credit in the economy)
2. Supervising and regulating institutions
3. Serving as a lender of last resort to financial institutions
4. Providing banking services to the us government
5. Issuing coin and currency
6. Providing financial services (such as check clearing) to commercial banks, savings and loan associations, savings banks, credit unions

Question 20

When the fed buys bonds is it expanding or contracting the money supply ?

Answer 20

Expanding the money supply

Question 21

Banking reserves

Answer 21

Ratio of reserves to the total amount of deposits

Question 22

Reserves

Answer 22

The amount of deposits that the federal reserve requires banks to hold and not lend

Question 23

The money supply rises by what

Answer 23

The money multiplier times the amount of bonds the fed purchases

Question 24

Reserve requirement

Answer 24

The percentage the federal reserve bank sets as the minimum amount of reserves a bank must have

Question 25

Discount rate

Answer 25

The rate of interest the fed charges for loans it makes to banks

Question 26

If most banks are short of reserves what will happen to the fed funds rate?

Answer 26

It will rise

Question 27

There’s been a big storm and cash held by individuals has increased. Should the fed buy or sell bonds ? Why?

Answer 27

The fed should buy bonds to offset the unintended decline in reserves

Question 28

The discount rate

Answer 28

The rate the fed charges banks for lending reserves