Module 10,12, 13, 14

Question 1

When the central bank wants to employ open market operations, what does this mean?

Answer 1

Expansionary: the fed is buying government securities, to increase reserves/money supply, and decrease rates
Contractionary: the fed is selling government securities, to decrease reserves/money supply, and increase rates

Question 2

Automatic stabilizers, tend to increase deficits during _____ and decrease deficits during _____.

Answer 2

taxes and transfer payments increases during a recession, thus increasing the deficit

Question 3

Refers to actions by a government to influence economic activity through changes in taxes and government spending

Answer 3

Fiscal policy

Question 4

Determined by the equilibrium between the demand for money and the supply of money is the ?

Answer 4

interest rate

Question 5

Increased budget deficits will increase the real interest rate and thereby reduce private investment

Answer 5

Crowd-out effect (Macroeconomic issues that can hinder usefulness of fiscal policy)
Increased budget deficits will increase the demand for loanable funds and lead to higher interest rates, and thus lower private investment.
Crowding-out implies that an increase in government spending will choke off private investment and reduce the intended impact of fiscal policy changes on aggregate demand

Question 6

Crowding-out implies that an ______ in government spending will choke off private investment and reduce the intended impact of fiscal policy changes on aggregate demand

Answer 6

increase

Question 7

Economic actors come to believe the inflation rate will be near the central bank’s target and factor this inflation rate into their decisions, show’s the central bank’s _____.

Answer 7

credibility

Question 8

Periodic inflation reports enhance the ______ of a central bank

Answer 8

transparency

Question 9

A central bank that determines both the policy rate and the method for computing the inflation rate is said to have ______.

Answer 9

independence

Question 10

Balanced budget multiplier condition:

Answer 10

government spending = Tax revenue
G = T
taxation matches the level of government spending

Question 11

Real GDP will _____, when the balance budget multiplier condition is met.

Answer 11

Increase
Government spending will increase G in the GDP equation
Taxation will decrease C+I in the GDP equation, but by a lesser amount
GDP= (C+I) + G + (X-M)

Question 12

Decreasing spending or increasing taxes are:

Answer 12

contractionary fiscal policy actions

Question 13

Expansionary fiscal policy tends to expand the _____ sector. Contractionary monetary policy tends to contract the ____ sector.

Answer 13

Public (government); expansionary fiscal policy increases government spending
Private: contractionary monetary policy causes higher interest rates, and thus less business investments

Question 14

The central bank should increase target interest rates when the economy is _______.

Answer 14

growing at an unsustainable (above-full-employment) level.
to try and slow down spending

Question 15

The neutral rate of interest = real trend rate of economic growth plus the inflation target

Answer 15

real trend rate of economic growth + the inflation target

Question 16

Policy rate < neutral rate

Answer 16

Expansionary fiscal policy

Question 17

Banks are able to borrow from the Fed at the _____.

Answer 17

discount rate

Question 18

The ______ is the interest rate banks charge other banks to borrow reserves from other banks

Answer 18

federal funds rate

Question 19

The rate that commercial banks charge their best customers.

Answer 19

prime rate

Question 20

Fisher effect states that nominal rate of interest=

Answer 20

Nominal rate of interest= real rate + expected inflation

Question 21

Unemployment rate=

Answer 21

unemployed / labor force

Question 22

Labor force=

Answer 22

Employed + Unemployed

Question 23

Competitive market that produces less output, and the sum of consumer and producer surplus is reduced:

Answer 23

Monopoly

Question 24

A firm’s initial response to an emerging economic contraction is:

Answer 24

Reduce output, by using less capital and labor

(i.e. reducing overtime hours)

Question 25

The unemployment rate:

Answer 25

lagging indicator

Question 26

Building permits:

Answer 26

leading indicator

Builders are seeking permits in anticipation of an economic expansion

Question 27

An increase in the policy rate will impact banks by:

Answer 27

Immediate increase in commerical bank’s base rates;
Reduced credit availability

An increase in the policy rate (federal funds rate) will likely raise the potential penalty that banks will have to pay if they run short of liquidity and thereby reduces their willingness to lend.

Question 28

Neutral interest rate=

Answer 28

real trend growth rate + inflation rate (expected or target)

Neutral > policy rate (fed funds rate) = Expansionary
Neutral <policy rate = contractionary