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
