assign7B - ASSIGNMENT 7B Due on Monday 3/9 before class DO...

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Unformatted text preview: ASSIGNMENT 7B Due on Monday 3/9 before class DO THE FOLLOWING BEFORE THE DEADLINE: 1. watch the video clips 2. read the news headlines below 3. read the explanations of hw7 questions that lots of people got wrong 4. review the big QUESTIONS FROM Assignment 7 5. Try the Chairman’s game from assignment 7 5. review the voice over slides from out missed class 7 (if you haven’t already) and be prepared to answer some of the clicker questions below 6. Do HW 7b (the multiple choice questions below) which will test you on all of the above. 1. Watch three very short videos at: click on the screen, then on learn more, then policy in depth, then on each of the following: what are the goals how does it work who sets policy (you may have to click on start over in-between each clip) What are the goals, tools and targets of Fed policy? How could you make a ‘video’ like those about Bernanke or Greenspan for extra credit? 2. NEWS What Are the Odds of a Depression? International evidence suggests there is a 20% chance our stock-market crash will lead to much worse. By ROBERT J. BARRO Central questions these days are how severe will the U.S. economic downturn be and how long will it last? The most serious concern is that the downturn will become something worse than the largest recession of the post-World War II period -- 1982, when real per capita GDP fell by 3% and the unemployment rate peaked at nearly 11%. Could we even experience a depression (defined as a decline in per-person GDP or consumption by 10% or more)? David Gothard The U.S. macroeconomy has been so tame for so long that it's impossible to get an accurate reading about depression odds just from the U.S. data. My approach uses long-term data for many countries and takes into account the historical linkages between depressions and stock-market crashes. (The research is described in "Stock-Market Crashes and Depressions," a working paper Jose Ursua and I wrote for the National Bureau of Economic Research last month.) The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s. … (WSJ) Buffet’s Berkshire Hathaway versus the S&P 500 Near-term outlook for U.S. darkening: Fed officials Beige Book: No Turnaround Soon Wed Mar 4, 2009 10:00pm GMT "Other incoming data give little reason to be upbeat about the immediate future. Unemployment continues to rise," said Lockhart, a voting member of the Fed's policy-setting Federal Open Market Committee this year. He told reporters that he was apprehensive about the February jobs report, which is due on Friday. The Fed has cut interest rates to almost zero and more than doubled the size of its balance sheet to around $2 trillion through programs to support private lending in a bid to prevent the downturn from steepening. "National economic conditions deteriorated further," the Fed said in its Beige Book summary gathered from districts around the country. "The deterioration was broad based." The rapid decline in U.S. growth is the worst since the early 1980s and there is no recovery yet at hand. "All indicators thus far point to our economy being on track for a decline of roughly the same magnitude in the first quarter of 2009," said Dallas Federal Reserve Bank President Richard Fisher, speaking in Fort Worth, Texas. "2008 was an annus horribilis -- a truly horrible year that only a sadist could look back upon with pleasure," Fisher said. "We might call this the Godzilla economy -- it presents a monstrous challenge." Fisher, who is not a voting member of the FOMC this year, told reporters he was the most pessimistic of all of his colleagues about the prospects for 2009 and feared the country might suffer two years of recession. Banks have around $2.5 trillion worth of commercial real estate loans on their books, and while this was "I want to assure you that the Fed has the capacity to act, even with the federal funds rate near zero, with the aim of returning the country as quickly as possible to its enormous potential for growth and prosperity," Lockhart said. Silver Lining in Gloomier Goldman Forecast Goldman Sachs released new economic forecasts that project a sharply worse economic contraction in the first half of 2009 and a jump in the unemployment rate to 10% by 2010. However, there were some bright spots for those looking for a bottom. Economists at Goldman now expect GDP to contract at an annual rate of 7% in the first quarter and shrink 3% in the second. … The revisions have major negative implications for unemployment forecasts. Goldman now expects the jobless rate to reach 9% by the third quarter of this year, up from the current 7.6%, and it sees the rate hitting 9.5% by the end of 2009 and 10% by the end of 2010. The unemployment rate hasn’t hit double digits since the deep recession of the early 1980s, when it reached 10.8%. However, that weakness in consumer spending spelled a small piece of good news. Goldman economists now think that the worst is over for spending. “Consumers will begin to see some benefits from the recently enacted fiscal package, which should help ease the tight budget constraints imposed by the labor market deterioration,” Goldman economists said. “In addition, the tightening in credit standards during the second half of 2008, which probably played a significant role in the contraction in consumer spending, has since eased.” They expect consumer spending to start rising again in the second quarter, and they see economic growth returning in the third quarter. Though the pain will continue in the labor market, the economists expect the economy to expand in the second half of 2009 — at a 1% annual rate — and throughout 2010, though it is expected to remain slow — below 2%. “On balance, the pattern of recent data surprises and their impact on our economic outlook is encouraging in the sense that our forecast adjustments are concentrated in sectors that tend to lag economic activity,” Goldman economists said, but they still see some problems remaining in housing. Housing “appears to be even a larger drag in the current quarter than we had anticipated,” they said. “However, given the low levels to which starts have fallen, we continue to think that homebuilding will stabilize later this year.” –Phil Izzo • Report: 20% of Mortgages Underwater A new report suggests 20% of all U.S. residential properties with a mortgage were underwater at the end of December, with mortgage debt greater than the homes' worth. So what? • BOE Turns to Quantitative Easing The Bank of England cut its key interest rate by half a percentage point to 0.5% and said it would buy $106 billion in assets to help expand the money supply. Why you may be able to push on a string – even with interest rates at 0 (or in a liquidity trap) central bank can continue to increae the money supply by buying different assets and thus increase spending. U.S. Moves to Free Up Credit The Fed launched a program to encourage investors to finance as much as $1 trillion in new lending to consumers and businesses. TALF Fed is supporting ‘shadow banking system’ which provides much of the funds for consumer and other borrowing by “securitizing” liabilities – like car loans GM, auditor express doubts over survival MarketWatch - 51 minutes ago By Steve Goldstein, MarketWatch LONDON (MarketWatch) -- General Motors and its auditor, Deloitte & Touche, on Thursday expressed doubts over the automaker's ability to survive, which in part will depend on car sales rising next year. Why did GM and their Auditor release this information? Hint - SEC ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 3. HW 7 – Questions in red have explanations below them but NOT the correct letter choice – you should easily recognize the correct letter if you read and understand the explanation – if not, post on discussion board for this weeks hw. 1) he opportunity cost of holding money is the T A) ase with which an asset can become money. e B) rice of goods and services. p C) evel of wage and rental income. l D) nterest rate. i 2) hen the interest rate rises, the quantity of money demanded decreases because W A) he price level also rises and people decrease their demand for money. t B) eople shift funds from money holdings to interest-bearing assets. p C) eople move funds from interest-bearing assets into money. p D) eople will buy fewer goods and hold less money. p 3) hen real GDP increases, the demand for money W A) ncreases. i B) ecreases. d C) e cannot make a prediction without additional information. w D) tays the same. s 4) _______ real GDP increases the demand for money and ________ the interest rate _ decreases the quantity of money demanded. A) ncreasing; increasing I B) ecreasing; decreasing D C) ncreasing; decreasing I D) ecreasing; increasing D 5) he demand for money curve T A) s horizontal. i B) as a negative slope. h C) as a positive slope. h D) s vertical. i 6) n the above figure, suppose the economy is initially on the demand for money I curve MD1. What is the effect of a fall in the interest rate? A) here would be a movement upward along the demand for money curve T MD1. B) he demand for money curve would shift rightward to MD2. T C) he demand for money curve would shift leftward to MD0. T D) here would be a movement downward along the demand for money curve T MD1. LIKE THE DEMAND CURVE FOR PEANUTS, A CHANGE IN THE PRICE (INTEREST RATE IS THE PRICE OF MONEY) MOVES ONE **ALONG** THE MD1 CURVE 7) n the figure above, an increase in the monetary base would create a change such as I a A) ovement from point a to point b along the supply of money curve MS0. m B) hift from the supply of money curve MS1 to the supply of money curve MS0. s C) hift from the supply of money curve MS0 to the supply of money curve MS1. s D) ovement from point b to point a along the supply of money curve MS0. m 8) n the money market, if the interest rate exceeds the equilibrium interest, there is I a surplus of money. How is the surplus eliminated? A) he Federal Reserve will destroy currency, reducing the quantity of money. T B) he high interest rate increases the demand for money, eliminating the T surplus. C) eople buy bonds to rid themselves of the surplus money, bidding up their P price and pushing interest rates down. D) anks will lend out the surplus, lowering interest rates. B IF THE INTEREST RATE IS ABOVE EQUILIBRIUM (WHY IN A MINUTE) THEN IT WILL FALL UNTIL EQUILIBRIUM IS REESTABLISHED. HOW? SLIGHTLY COMPLICATED. IF YOU DON’T WANT TO HOLD MONEY, YOU BUY BONDS INSTEAD, WHICH EARN INTEREST. SO IF THE INTEREST RATE IS ABOVE EQUILIBRIUM, YOU WILL BUY BONDS WHICH WILL DIRVE UP THE PRICE OF BONDS (WHEN THE DEMAND FOR ANYTHING GOES UP, ITS PRICE RISES). WHEN THE PRICE OF BONDS GO UP, THEIR INTEREST RATE GOES DOWN (I’LL EXPLAIN WHY LATER IN THE SEMESTER). SO, IF INT RATE ABOVE EEQUILIB, PEOPLE WON’T WISH TO HOLD MONEY, THEY WILL BUY BONDS, DRIVING BOND PRICES UP, INTEREST RATES DOWN, UNTIL THEY WISH TO HOLD MONEY AND A NEW EQUILIB RATE IS ESTABLISHED. 9) n the figure above, if the interest rate is 8 percent, people demand $0.1 trillion I A) ess money than the quantity supplied and the interest rate will fall. l B) ore money than the quantity supplied and the interest rate will fall. m C) ess money than the quantity supplied and the interest rate will rise. l D) ore money than the quantity supplied and the interest rate will rise. m 10) n the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess I A) emand for money and the interest rate will rise. d B) emand for money and the interest rate will fall. d C) uantity of money and the interest rate will rise. q D) uantity of money and the interest rate will fall. q AT INT RATE OF 4% MD=3.3, MS=3.2 AND AS EXPLAINED ABOVE, WITH INT RATE BELOW EQUILIB, PEOPLE WILL BE WISH TO HOLD MUCH MONEY (WHY HOLD BONDS IF THEY DON’T EARN MUCH INTEREST?) AND FEW BONDS, THE PRICE OF BONDS WILL FALL AND INT RATES RISE UNTIL EQUILIB RESTORED. 11) n the short run, which of the following actions lower the interest rate? I A) decrease in bond prices NO – IF BOND PRICES RISE, INT RATES FALL a B) decrease in the quantity of money NO – IF MS FALLS, INT RATES RISE a (LOOK AT GRAPH ABOVE) C) decrease in the demand for money IF MD FALLS, INT RATES FALL – a LOOK AT GRAPH D) n increase in the demand for money RAISES INT RATES a 12) hich of the following is one of the Fedʹs policy goals? W A) xchange rate e B) onetary base m C) elp the President win reelection h D) rice level stability p 13) The core inflation rate, measured by the core CPI, measures changes in the A) prices of all consumer goods except food and fuel. B) price of only two consumer goods: food and fuel C) prices of all consumer goods except health care. D) prices of all consumer goods 14) Which of the following bodies are responsible for the conduct of monetary policy? A) Congress B) the President C) the Federal Reserve System D) Congress and the President, jointly 15) he Federal Open Market Committee meets ________ times per year. T A) 6 2 B) 52 C) 2 D) 8 16) The federal funds rate is the interest rate A) on the 30-year treasury bond. B) also known as the prime rate. C) banks charge each other on overnight loans. D) on the 3-month Treasury bill. 17) he Taylor rule uses three variables to determine the target for the federal funds T rate. Which of the following is NOT one of those variables? A) monetary base B) output gap C) inflation rate D) equilibrium real interest rate 18) f the Fed follows the Taylor rule and the economy goes into a recession, the Fed I would A) educe tax rates. r B) ncrease government expenditures. i C) ower the federal funds rate. l D) one of the above answers are correct. N 19) hen the Fed sells government securities to a bank, how are the Fedʹs assets W affected? A) The amount of the Fedʹs government securities decreases. B) The amount of the Fedʹs government securities increases. C) The amount of reserves held at the Fed decreases. D) The amount of reserves held at the Fed increases. SEE BELOW. NOTE THIS ISA **T‐ACCOUNT** NOT A BALANCE SHEET – IT SHOWS CHANGES IT ASSETS AND LIABILITIES, NOT THE LEVEL. A ‐ MEANS A DECLINE. SO IF THE FED SELLS $100 WORTH OF BONDS TO A PRIMARY DEALER (OFTEN A BANK), THEN THE FED HAS $100 LESS IN BONDS – A DECLINE IN ASSETS OF 100. HOWEVER, IT CHARGES THE BANK BY REDUCING THE BANKS RESERVE ACCOUNT WITH THE FED ‐ FED ASSETS LIABILITIES SECURITIES ‐100 RESERVES OF ‐100 BANKS 20) f the Fed buys U.S. government securities, I A) he discount rate will rise. t B) ank reserves will decrease. b C) he federal funds rate will rise. t D) he federal funds rate will fall. t OPEN MKT PURCHASES OF **USED/OUTSTANDING** GOVERNMENT SECURITIES INCREASES RESERVES AND MONEY SUPPLY‐>REDUCES ‘PRICE OF MONEY=INT RATE=FED FUNDS RATE 21) f the Fed sells U.S. government securities, I A) he U.S. Treasury gains some revenue. t B) ank reserves increase. b C) he federal funds rate rises. t D) one of the above answers is correct. N THE OPPOSITE OF 20 22) In an open market purchase, the Fed ________ government securities, which ________ bank reserves. A) buys, increases B) sells, decreases C) sells, increases D) buys, decreases SEE 20 23) n the market for bank reserves, if the federal funds rate target is higher than the I federal funds rate, the Fed will take action to ________ reserves. A) decrease the supply of B) increase the supply of C) decrease the demand for D) increase the demand for IF FED WANTS FF RATE HIGHER THAN IT IS NOW (THE TARGET IS HIGHER THAN THE CURRENT RATE), THEY WILL REDUCE THE SUPPLY OF MONEY=RESERVES 24) If the Fed increases the monetary base, the A) demand for money decreases. B) federal funds rate falls. C) quantity of money decreases. D) federal funds rate rises. MONETARY BASE = MONEY SUPPLY (SORT OF MS=MxMB) SO IF FED INCREASE MS, INT RATES (=FF RATE) FALL 25) he Taylor rule T A) s the rule actually followed by the Fed. i B) gnores price level stability to focus on responding to fluctuations in real GDP. i C) ocuses on only fluctuations in real GDP. f D) hows how the Fed could set the federal funds rate. s 26) onetary policy affects real GDP by M A) reating budget deficits. c B) hanging aggregate demand. c C) hanging aggregate supply. c D) reating budget surpluses. c 27) ong-term interest rates are ________ than short-term because long-term loans L are ________ than short-term loans. A) lower; safer B) higher; riskier C) lower; riskier D) higher; safer LONG TERM LOANS ARE RISKIER SO HIGHER YIELD/RATE 28) When the Fed lowers the federal funds rate, aggregate demand A) ould increase, decrease or stay the same. c B) increases. C) stays the same. D) decreases. 29) hen the Fed lowers the federal funds rate, it leads to W A) he Fed selling government securities. NO, THEY BUY THEM TO LOWER t RATES B) decrease in the quantity of money. NO, THEY RAISE MS BY OPEN MKT a PURCHASES C) decrease in demand deposits. NOW, OPEN MKT PURCHASES a INCREASE DEPOSITS D) n increase in lending by banks. YES, EXPANSIONARY MONETARY a POLICY ‐> MORE RESERVES‐> MORE LENDING (NORMALLY) 30) f the U.S. interest rate rises, the exchange rate value of the dollar ________ and I net exports ________. A) ises; decrease r B) alls; decrease f C) ises; increase r D) alls; increase f U.S INT RATES UP FOREIGNERS WANT TO PUT MONEY IN U.S. BANKS AND BONDS, HENCE DEMAND $ (SELL THEIR CURRENCY) HENCE DOLLAR APPRECIATES AND OUR EXPORTS FALL SINCE MORE EXPENSIVE TO FOREIGNERS AND OUR IMPORTS RISE AND NEXT EXPORTS FALL (X‐M) 31) hen the Fed raises the federal funds rate, other W A) nterest rates rise, consumption, investment and net exports decrease, and the i aggregate demand curve shifts leftward. B) nterest rates fall, consumption, investment and net exports decrease, and the i aggregate demand curve shifts leftward. C) nterest rates rise, consumption, investment and net exports increase, and the i aggregate demand curve shifts rightward. D) nterest rates fall, consumption, investment and net exports increase, and the i aggregate demand curve shifts rightward. 32) n an AS/AD figure, lowering the federal funds rate initially shifts the I A) ong-run AS curve leftward. l B) D curve rightward. A C) D curve leftward. A D) ong-run AS curve rightward. l 33) he short-run effect of lowering the federal funds rate T A) aises the price level and increases real GDP. r B) aises the price level and decreases real GDP. r C) owers the price level and decreases real GDP. l D) owers the price level and increases real GDP. l INT RATES (FF RATE) DOWN ‐> INVESTMENT UP ‐> D UP‐>P,Y UP 34) n the short-run, lowering the federal funds rate will shift the ________ curve I ________ and ________ real GDP. A) ggregate demand; leftward; increases a B) ggregate demand; leftward; decreases a C) ggregate supply; rightward; increases a D) ggregate demand; rightward; increases a AGG D – SEE 33 35) n order to combat a recession, the Fed will ________ the federal funds rate thereby I ________ the quantity of money. A) aise; decrease r B) ower; increase l C) ower; decrease l D) aise; increase r 36) n the above figure, if the economy is initially at point a, the short-run effect of a I cut in the federal funds rate is given by movement from point A) to point b, increasing output and decreasing the unemployment rate. a B) to point b, increasing output and the unemployment rate. a C) to point d, decreasing output and increasing the unemployment rate. a D) to point c, keeping output and the unemployment rate constant. a SEE ABOVE ‐ INT RATES (FF RATE) DOWN ‐> INVESTMENT UP ‐> D UP‐>P,Y UP MONETARY POLICY SHOFTS AGGREGATE DEMAND CURVE 37) ilton Friedmanʹs k-percent rule says to set the rate of growth of the quantity of M money equal to A) he rate of growth of potential GDP. t B) he unemployment rate. t C) constant. a D) he real interest rate. t BAD CHOICES – STRICTLY SPEAKING, ANY CONSTANT RATE, BUT OFTEN SAY CONSTANT RATE OF GROWTH OF POTENTIAL OUTPUT 38) nder a k-percent rule, if the economy goes into a expansion, the Fed would U A) ncrease the quantity of money. i B) aise the federal funds rate. r C) ower tax rates to keep revenue constant. l D) one of the above answers are correct. N DO NOTHING – CONSTANT RATE NO MATTER WHAT 39) Inflation targets are usually specified as A) a specific inflation rate target, for example, 1 percent. B) the short-term interest rate rate minus 2 percent. C) a range for the inflation rate. D) deviations from the inflation rate. GENERALLY A RANGE SINCE IT IS IMPOSSIBLE TO CONTROL PRECISELY. IF INFLATION GOES ABOVE, CONTRACTIONARY MONETARY POLICY – RAISE RATES. BELOW, EXPANSIONARY, LOWER RATES 40) he discount rate is T A) he interest rate the Fed charges on loans to banks. t B) he interest rate that banks charge their most preferred customers. t C) he price the Fed pays for government securities. t D) he price banks pay the Fed for government securities. t 41) t its inception, the Federal Reserve was intended to be A A) regulator of bank holding companies. a B) he issuer of government debt. t C) he Treasuryʹs banker. t D) lender-of-last-resort. a LENDER OF LAST RESORT – PROVIDE LOANS/ LIQUIDITY TO BANKS WHO HAD SOUND ASSETS BUT NOT ENOUGH CASH 42) he most common definition that central bankers use for price stability is T A) n inflation rate of zero percent. a B) ow and stable inflation. l C) igh and stable inflation. h D) ow and stable deflation. l 43) he Federal Reserve System was created to T A) ake it easier to finance budget deficits. m B) romote rapid economic growth. p C) ower the unemployment rate. l D) romote financial market stability. p 44) he type of monetary policy that is used in Canada, New Zealand, and the United T Kingdom is A) nterest-rate targeting. i B) onetary targeting. m C) nflation targeting. i D) argeting with an implicit nominal anchor. t 45) ccording to the Taylor rule, the Fed should raise the federal funds interest rate A when inflation ________ the Fedʹs inflation target or when real GDP ________ the Fedʹs output target. A) ises above; drops below r B) rops below; rises above d C) rops below; drops below d D) ises above; rises above r BASICALLY, RULE SAYS FF RATE SHOULD RISE IF INFLATION GOES ABOVE A ‘TARGET’ RATE AND FALL IF OUTPUT FALLS BELOW A TARGET. SO RAISE RATES WHEN INFLATION TOO HIGH, OR REAL GDP RISING ABOVE POTENTIAL. 46) he primary indicator of the Fedʹs stance on monetary policy is T A) he growth rate of M2. t B) he discount rate. t C) he growth rate of the monetary base. t D) he federal funds rate. t 47) he time it takes the FED or Congress to change economic policy is T A) recognition lag. a B) response lag. a C) n implementation lag. a D) one of the above N 48) he time it takes for a new economic policy to affect behavior in the economy is T A) n implementation lag. a B) recognition lag. a C) response lag. a D) one of the above N IMPACT (IMPLEMENTATION IS HOW LONG TO PASS LAW OR CHANGE MONETARY POLICY) 49) he implementation lag for fiscal policy is longer than for monetary policy because T A) onetary policy changes more quickly affect behavior than than fiscal policy m changes B) iscal policy changes more quickly affect behavior than monetary policy f changes. C) t takes longer for the FED to act than Congress. i D) t takes longer for Congress to act than the FED. i FISCAL POLICY HAS LOTS OF POLITICS HENCE LONG IMPLEMENTATION, GENERALLY 50) n general, monetary policy has a longer __________ lag than fiscal policy but I shorter __________ lag. A) mplementation; recognition i B) ecognition; response r C) esponse; implementation r D) mplementation; response i 51) he critics of stabilization policy such as Milton Friedman argue that monetary T policy is comparable to ʺthe Fool in the Shower.ʺ This means that A) olicy initiatives are perfect in maintaining the economy. p B) olicy initiatives are perfectly timed. p C) olicy initiatives are often destabilizing because of time lags. p D) olicy initiatives always impact at the proper time in stabilizing the economy. p 52) he Federal Reserveʹs policy to ʺlean against the windʺ means that T A) he FED lowers required reserves as the economy booms. t B) he FED slows money growth as the economy booms. t C) he FED raises taxes as the economy booms. t D) he FED increases money growth as the economy booms. t FED ‘TAKES AWAY THE PUNCH BOWL JUST WHEN THE PARTY IS GETTING GOOD’ – I.E., SLOWS ECONOMY WHEN GROWING TOO QUICKLY *INFLATION) AND SPEEDS UP WHEN TOO SLOW ‐ COUNTERCYCLICAL POLICY – SLOWS MS GROWTH WHEN ECONOMY BOOMS 53) uring periods of stagflation, an increase in the money supply will D A) ncrease inflation and lower the level of output. i B) ncrease inflation and the level of output. i C) ncrease exports. i D) ower inflation and the level of output. l STAGFLATION (SHIFT UP IN AGG S) RAISES P/INFLATION AND LOWERS OUTPUT HENCE INCREASE IN MS ‐> INCREASE IN AGG D‐> P UP (INFLATION WORSE) Y UP (STAGNATION BETTER) ...
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