Exam 26: Monetary Policy

Beginning in 2008, The Federal Reserve and the U.S. Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways. Briefly summarize the 4 key actions of the Fed and Treasury.

Changes in interest rates affect all four components of aggregate demand.

The larger the fraction of an investment financed by borrowing

A monetary policy target is a variable that

In which of the following situations would the Fed conduct contractionary monetary policy?

If the Fed's policy is contractionary, it will

Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $800 billion. Suppose the Federal Reserve increases the money supply to $850 billion. At the previous equilibrium interest rate of 5 percent, will households and firms now be holding more money or less money than they want to hold, and will they be buying or selling short-term financial assets? At the new equilibrium interest rate, households and firms will desire to hold the entire $850 billion of the money supply. What causes households and firms to want to hold the additional $50 billion of the money supply?

Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply

An increase in the interest rate causes

If the Federal Reserve raises or lowers interest rates too late, it could result in a ________ policy that destabilizes the economy.

When housing prices ________ as they did beginning in 2006 following the housing market bubble, most banks and other lenders tightened the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages.

During the turmoil in the market for subprime mortgages in 2007 and 2008, the Fed increased the volume of discount loans. The goal of the Fed was to

In 2008, the Treasury and Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing. Which of the following is one reason why these measures were taken?

The Fed can attempt to increase the federal funds rate by

The Fed

Contractionary monetary policy on the part of the Fed results in

The Federal Reserve System's four monetary policy goals are

Contractionary monetary policy refers to the Fed's decreasing the money supply and decreasing interest rates to decrease real GDP.

An increase in real GDP can shift

Table 26-2 -Refer to Table 26-2. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2019, it should