Exam 15: Monetary Policy

The Fed

A financial asset is considered a security if

An increase in interest rates

When housing prices fall,as they did beginning in 2006 following the housing market bubble,consumption spending on furniture,appliances,and home improvements ________ as many households found it ________ to borrow against the value of their homes.

An argument in favor of the Federal Reserve adopting inflation targeting is that in the long run,the Fed can have an impact on inflation but not on real GDP.

By the height of the housing bubble in 2005 and early 2006,lenders had greatly loosened the standards for obtaining a mortgage loan,with many mortgages being granted to sub-prime borrowers ________ and "Alt-A" borrowers ________.

Table 15-7 -Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium.For Year 2,graph aggregate demand,long-run aggregate supply,and short-run aggregate supply such that the condition of the economy will induce the Federal Reserve to conduct an expansionary monetary policy.Briefly explain the condition of the economy and what the Federal Reserve is attempting to do.

Monetary policy could be procyclical if the Federal Reserve

What is a mortgage? What were the important developments in the mortgage market during the years after 1970?

Table 15-6 -Refer to Table 15-6.Suppose the table above illustrates the values of real and potential GDP and the price level if the Fed does not vote to change their current policy to be more contractionary or expansionary.If the Fed wants to keep real GDP at its potential level in 2017,should the Fed use a contractionary or expansionary policy? Should it raise or lower its interest rate target? How should it conduct open market operations to achieve its goal?

The top policy goal for Paul Volcker when he became chairman of the Federal Reserve's Board of Governors in 1979 was

Table 15-8 -Refer to Table 15-8.The hypothetical information in the table shows what the values for real GDP and the price level would have been in 2014 if the Federal Reserve did not use monetary policy: a.If the Fed wanted to keep real GDP at its potential level in 2014,should it have used an expansionary policy or a contractionary policy? Should the trading desk have bought T-bills or sold them? b.Suppose the Fed's policy was successful in keeping real GDP at its potential level in 2014.State whether each of the following would be higher or lower than if the Fed had taken no action: (i)Real GDP (ii)Full-employment real GDP (iii)The inflation rate (iv)The unemployment rate c.Draw an aggregate demand and aggregate supply graph to illustrate your answer.Be sure that your graph contains LRAS curves for 2013 and 2014;SRAS curves 2013 and 2014;AD curve for 2013 and 2014,with and without monetary policy actions;and equilibrium real GDP and the price level in 2014 with and without policy.

When housing prices ________,as they did beginning in 2006 following the housing market bubble,consumption spending on furniture,appliances,and home improvements decline as many households find it ________ to borrow against the value of their homes.

Describe how the Fed uses open market operations to change short-term and long-term interest rates.

An increase in the interest rate should ________ the demand for dollars and the value of the dollar,and net exports should ________.

Consider the Taylor rule for the target of the federal funds rate.Suppose the equilibrium real federal funds rate is 2 percent,the target rate of inflation is 3 percent,the current inflation rate is 3 percent,real GDP equals potential real GDP,and the weights are 1/2 for the inflation gap and the output gap.Using the Taylor rule,what does the target for the federal funds rate equal? Next,if the Federal Reserve lowered the target for the inflation rate to 1 percent,how much would the target for the federal funds rate change?

Using the money demand and money supply model,an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

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

Firms that participate in regular open market transactions with ________ are called primary dealers.