Past exams Flashcards
If the economy moves into a recession, the Fed would recommend that the federal funds target rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation
inflation targetting
In October 2008, Congress passed the _______________, under which the Treasury provided funds to banks in exchange for stock
Troubled Asset Relief Program (TARP)
Where does the short-run Phillips curve intersect the long-run Phillips curve?
The point where actual inflation is equal to expected inflation
Also, the natural rate of unemployment
Flat tax?
The distribution of income would be more unequal under the tax
In the Phillips curve, an increase in inflation will decrease unemployment if the inflation is _____________ by both workers and firms.
unexpected
*will decrease unemployment because worker’s wage is less
If actual inflation is less than expected inflation, what will happen to real wages?
real wages will rise
If one U.S. dollar could be exchanged for one Canadian dollar in 1970, and one U.S. dollar can now be exchanged for 1.13 Canadian dollars, what happened?
The Canadian dollar lost value against the U.S. dollar
If firms and workers have rational expectations, including knowledge of the policy being used by the Fed, then _____________
expansionary monetary policy is ineffective
Purchasing power parity is the theory that, in the long-run, exchange rates should be at a level such that equivalent amounts of any country’s currency __________________
allow one to buy the same amount of goods and services
Economists who believe the supply-side effects of tax cuts are small essentially believe that ____________________
tax cunts mainly affect aggregate demand
An increase in interest rates shifts Aggregate Demand _______________
left
An increase in the demand for American-made goods in foreign countries will ________________________
increase the demand for dollars on the foreign exchange market
If workers and firms know that the Federal Reserve is following an expansionary monetary policy, workers and firms will expect inflation to ___________ and will adjust wages so that the real wage ______________
increase; remains unchanged
Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the federal funds target rate equals the _______________
real equilibrium federal funds rate
If the economy is producing at potential GDP, _____________________________
unemployment is at its natural rate
Describe supply-side economics
Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply
*Taxes are bad for investments and businesses
Monetary policy could be procyclical if the Federal Reserve ____________________________
is late recognizing that a recession has begun and conducts expansionary monetary policy
Expansionary monetary policy =>
lower interest rates => decrease demand for U.S. dollars => dollar depreciates
An expansionary monetary policy in the United States should ___________________________
decrease the foreign currency price of U.S. exports
If the exchange rate between the U.S. dollar and the Indian rupee (rupees per dollar) is greater than the relative purchasing power between two countries, what could happen?
There are opportunities for profit by purchasing goods in India and then selling them in the United States
An increase in the interest rate should _________ the demand for dollars and the value of the dollar, and net exports should _______________
increase; decrease
increase in interest rates =>
increase demand for dollars => increase value of dollar
Under the monetary growth rule proposed by the monetarists, the money supply would grow each year at a constant rate equal to the long-run rate of growth of ______________
real GDP
From an initial long-run macroeconomic equilibrium, if the Fed anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Fed would most likely ______________
decrease interest rates
Decrease interest rates =>
increase aggregate demand
Since 2008, the European Central bank has reacted more ___________ to the recession than has the federal reserve, with the European interbank offer rate of interest remaining ______________ than the federal funds rate
slowly; higher
Depreciation of dollar represents a shift of demand in what way?
Assume: euros per dollars
Shift downward (left)
If workers and firms raise their inflation expectations, then ______________________
the short-run Phillips curve will shift upward
Why weren’t mortgages considered securities prior to 1970?
Prior to 1970, mortgages were rarely resold in the secondary market
Empirical evidence shows workers and firms have rational expectations =>
always on vertical LRPC
The crowding out of private spending by government spending will be greater the _______________________
more sensitive consumption, investment, and net exports are to changes in interest rates
If the dollar appreciates, how will aggregate demand in the United States be affected?
aggregate demand will shift to the left as imports increase
“Real business cycle” theorist
“wages adjust rapidly to changes in inflation as long as expectations are formed rationally”
Look for real reasons why events happen
Technology shocks affect aggregate supply
Contractionary monetary policy on the part of the Fed results in _____________________________________
a decrease in the monetary supply, an increase in interest rates, and a decrease in GDP
What is a “structural” relationship?
A relationship that depends on the basic behavior of consumers and firms and remains unchaged over long periods
The major criticism of real business cycle models is:
negative technology shocks are uncommon and can’t explain all business cycle fluctuations
oil shock = negative techn. shock
Speculation in currency markets =>
important in determining exchange rate fluctuations in the short run but NOT the long run
Wages and salries typically make up __________ percent of total compensation costs of a typical U.S. firm
70
Inflation low =>
interest rate high
Monetary policy has a ______________ effect on aggregate demand in a __________ economy
stronger, open
Fiscal policy has a ____________ effect on aggregate demand in an open economy
weaker
The gold standard is an example of ______________
a fixed eschange rate system
The index of leading economic indicators is a composite of __________ economic indicators
10
What can the Fed do to reduce the natural rate of unemployment?
nothing
If the long-run aggregate supply curve is vertical, =>
the trade-off between unemployment and inflation cannot be permanent
Balance of Trade
Ex - Im
Why did the gold standard get abandoned?
The government wanted to rapidly expand the money supply in response to the Great Depression
Increase in Money supply =>
decrase interest rates
Above 0 in the Empire State Manufacturing Survey Index:
expanding
The core inflation rate in theU.S. is currently close to the Federal Reserve’s explicit target of ___________
2%
Balance of payments includes which three accounts?
The current account
The financial account
The capital account
The recovery has boosted U.S exports of:
Capital goods
industrial supplies
Investment-based activities
consumer confidene fell because of all except:
falling debt burdens
How does an increase in the budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market?
Demand for dollars rises
Supply of dollars falls
How might a budget deficit affect the balance of trade?
A budget deficit raises interest rates, which raises exchange rates, and reduces the balance of trade
Budget deficit increases:
Government borrows
interest rate goes up => exchange rate goes up
$ demand goes up
$ supply goes down
The United States is called a debtor nation because
it hsa large current account deficit and is simultaneously funded by foreign investment
If interest rates in the US rise, then ______________
the value of the dollar will rise as the foreign investors increase their holdings of U.S. investments
Federal government debt held by the public is no more than __________
10 trillion
A higher inflation rate can lead to lower unemployment if _________________________
neither workers nor employers mistakenly expect the inflation rate to be lower than it turns out to be
China has been accused of undervaluing its currency in order to _________
increase its exports
An increase in capital inflows will ________________
increase the equilibrium exchange rate
If the U.S. imports more than the U.S. exports, then _____________
the U.S. will have a current account deficit
If the Thai baht is pegged above the equilbrium exchange rate as expressed in dollars per baht =>
the currency is overvalued
If the value of goods exported is smaller than the value of goods imported, then _______________________
the U.S. trade balance will be negative
The federal funds rate is:
the interest rate a bank charges each other for overnight loans
taylor rule predicted changes in federal funds target during =>
alan greenspan
A country that imports a significant proportion of its consumer goods can avoid inflation by adopting a fixed exchange rate because it can avoid the price increases of ______________ that occur when the value of the domestic currency ____________
imports; falls
U.S. exports are currently back to pre-recession levels. What was a major factor contributing to this result?
Depreciating dollar
The dolla will appreciate relative to the yen if:
speculators think the value of the dollar relative to the yen will rise
If europe experiences a recession, we expect the dollar to _____________ and U.S. net exports to ___________
depreciate
rise
Rising prices erode the value of money as a __________ and a ____________
medium of exchange
store of value
how the bond market “prices in” higher expected inflation
widening gap between moninal and TIPS interest rates
Federal budgtet deficit leads to:
Increase in interest rates
appreciation of the dollar
decline in net exports
An incrase in the money supply will _______________
decrease the interest rate
Contractionary monetary policy will ___________ the interest rate
raise
If the Fed raises the interest rate, this will ____________ inflation and ____________ real GDP in the short run
reduce; lower
When inflation is very low, workers and firms _________
ignore inflation
MS increases =>
interest rates decrease => C, I, NX increase
Falling interest rates can _______________________
increase a firm’s stock price, which causes firm to issue more stock shares, and thus increases funds for investment
Congress and the president do not play a role in ______________________
conducting monetary policy
decrease interest rates =>
increase firm’s stock price
Suppose the euro depcreciates against the dollar. Assuming all other factors remain constant, the real exchange rate of euros to U.S. dollars will _________
increase
Higher interest rates cause U.S. dollar to ___________
appreciate
How does an improvement in the Fed’s credibility affect our model of the Phillip’s curve?
The short-run Phillips curve shifts more rapidly
The body that is responsible for dating the beginning and ending dates for a recession is
the National Bureau of Economic Research
Money demand will increase if the price level ______________ or if real GDP _______________
increases; increases
If equilibrium GDP falls below potential
this will result in a budget deficit
If inflation is higher in the U.s. than inflation in JAPAn
the dollar will depreciate against the yen
An excess supply of the dollar in exchange for yen will cause
the dollar to decline in value relative to the yen
If interest rates rise, investment in stocks becomes
relatively less attractive
If the Fed lowers its target for the federal fund rate, this indicates that:
the fed is pursuing an expansionary monetary policy
