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micro economics
Questions and Answers of
Micro Economics
If a bank sells $10 million of bonds to the Fed to pay back $10 million on the loan it owes, what is the effect on the level of checkable deposits?
If you decide to hold $100 less cash than usual and therefore deposit $100 more cash in the bank, what effect will this have on checkable deposits in the banking system if the rest of the public
"The Fed can perfectly control the amount of reserves in the system." Is this statement true, false, or uncertain? Explain.
"The Fed can perfectly control the amount of the monetary base, but has less control over the composition of the monetary base." Is this statement true, false, or uncertain? Explain.
The Fed buys $100 million of bonds from the public and also lowers the required reserve ratio. What will happen to the money supply?
Go to the St. Louis Federal Reserve FRED database, and find the most current data available on Currency (CURRNS), Total Checkable Deposits (TCDNS), Total Reserves (RESBALNS), and Required Reserves
Go to the St. Louis Federal Reserve FRED database, and find data on the M1 Money Stock (M1SL) and the Monetary Base (AMBSL). a. Calculate the value of the money multiplier using the most recent data
If the manager of the open market desk hears that a snowstorm is about to strike New York City, making it difficult to present checks for payment there and so raising the float, what defensive open
Open market operations are typically repurchase agreements. What does this tell you about the likely volume of defensive open market operations relative to the volume of dynamic open market
Following the global financial crisis in 2008, assets on the Federal Reserve's balance sheet increased dramatically, from approximately $800 billion at the end of 2007 to $3 trillion by 2011. Many
"Discount loans are no longer needed because the presence of the FDIC eliminates the possibility of bank panics." Is this statement true, false, or uncertain?
What are the disadvantages of using loans to financial institutions to prevent bank panics?
Compare the methods of controlling the money supply-open market operations, loans to financial institutions, and changes in reserve requirements-on the basis of the following criteria: flexibility,
Why was the Term Auction Facility more widely used by financial institutions than the discount window during the global financial crisis?
What are the advantages and disadvantages of quantitative easing as an alternative to conventional monetary policy when short-term interest rates are at the zero lower bound?
Why is the composition of the Fed's balance sheet a potentially important aspect of monetary policy during an economic crisis?
What is the main advantage and the main disadvantage of an unconditional policy commitment?
Why is it that a decrease in the discount rate does not normally lead to an increase in borrowed reserves? Use the supply and demand analysis of the market for reserves to explain.
"The federal funds rate can never be above the discount rate." Is this statement true, false, or uncertain? Explain your answer.
"The federal funds rate can never be below the interest rate paid on reserves." Is this statement true, false, or uncertain? Explain your answer.
Why is paying interest on reserves an important tool for the Federal Reserve in managing crises?
Why are repurchase agreements used to conduct most short-term monetary policy operations, rather than the simple, outright purchase and sale of securities?
Go to the St. Louis Federal Reserve FRED database, and find data on nonborrowed reserves (NONBORRES) and the federal funds rate (FEDFUNDS). a. Calculate the percent change in nonborrowed reserves
In December 2008, the Fed switched from a point federal funds target to a range target (and it's possible that it will switch back to a point target in the future). Go to the St. Louis Federal
If higher inflation is bad, then why might it be advantageous to have a higher inflation target rather than a lower target that is closer to zero?
Why aren't most central banks more proactive in trying to use monetary policy to eliminate asset-price bubbles?
Why might it be better to lean against credit-driven bubbles rather than just clean up after other types of asset bubbles burst?
According to the Greenspan doctrine, under what conditions might a central bank respond to a perceived stock market bubble?
Classify each of the following as either a policy instrument or an intermediate target, and explain your choice. a. The ten-year Treasury bond rate b. The monetary base c. M1 d. The fed funds rate
What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios? a. Unemployment rises due to a recession. b. An oil price shock causes the inflation
Why would it be problematic for a central bank to have a primary goal of maximizing economic growth?
"Since financial crises can impart severe damage to the economy, a central bank's primary goal should be to ensure stability in financial markets." Is this statement true, false, or uncertain?
Why is a public announcement of numerical inflation rate objectives important to the success of an inflation-targeting central bank?
How does inflation targeting help reduce the time-inconsistency problem of discretionary policy?
The Fed's maximum employment mandate is generally interpreted as an attempt to achieve an unemployment rate that is as close as possible to the natural rate and inflation that is close to its 2% goal
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), real GDP (GDPC1), an estimate of potential GDP (GDPPOT), and the
If the British central bank lowers interest rates to reduce unemployment, what will happen to the value of the pound in the short run and in the long run?
In September 2012, the Federal Reserve announced a large-scale asset-purchase program (known as QE3) designed to lower intermediate and longer-term interest rates. What effect should this have had on
When the U.S. dollar depreciates, what happens to exports and imports in the United States?
When the Federal Reserve conducts an expansionary monetary policy, what happens to the money supply? How does this affect the supply of dollar assets?
Go to the St. Louis Federal Reserve FRED database, and find data on the exchange rate of U.S. dollars per British pound (DEXUSUK). A Mini Cooper can be purchased in London, England, for £17,865 or
Go to the St. Louis Federal Reserve FRED database, and find data on the daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), and Japanese yen (DEXJPUS). Also find data on the
What are some of the disadvantages of China's pegging the yuan to the dollar?
Suppose the Mexican central bank chooses to peg the peso to the U.S. dollar and commits to a fixed peso/dollar exchange rate. Use a graph of the market for peso assets (foreign exchange) to show and
Go to the St. Louis Federal Reserve FRED database, and find data on the capital account (BOPCAT) and the current account (BOPBCA). Calculate the net change in government international reserves for
Go to the St. Louis Federal Reserve FRED database, and find data on the monthly U.S. dollar exchange rate to the Chinese yuan (EXCHUS), the Canadian dollar (EXCAUS), and the South Korean won
How would you expect velocity to typically behave over the course of the business cycle?
According to the portfolio theories of money demand, what are the four factors that determine money demand? What changes in these factors can increase the demand for money?
Suppose a given country experienced low and stable inflation rates for quite some time, but then inflation picked up and over the past decade has been relatively high and quite unpredictable. Explain
Consider the portfolio choice theory of money demand. How do you think the demand for money would be affected during a hyperinflation (i.e., monthly inflation rates in excess of 50%)?
Both the portfolio choice and Keynes's theories of the demand for money suggest that as the relative expected return on money falls, demand for it will fall. Why does the portfolio choice approach
Why does the Keynesian view of the demand for money suggest that velocity is unpredictable?
What evidence is used to assess the stability of the money demand function? What does the evidence suggest about the stability of money demand, and how has this conclusion affected monetary
Suppose that a plot of the values of M2 and nominal GDP for a given country over 40 years shows that these two variables are very closely related. In particular, a plot of their ratio (nominal
If credit cards were made illegal by congressional legislation, what would happen to velocity? Explain your answer.
"If nominal GDP rises, velocity must rise." Is this statement true, false, or uncertain? Explain your answer.
Why would a central bank be concerned about persistent, long-term budget deficits?
"Persistent budget deficits always lead to higher inflation." Is this statement true, false, or uncertain? Explain your answer.
Some payment technologies require infrastructure (e.g., merchants need to have access to credit card swiping machines). In most developing countries, this infrastructure is either nonexistent or very
What three motives for holding money did Keynes consider in his liquidity preference theory of the demand for real money balances? On the basis of these motives, what variables did he think
Go to the St. Louis Federal Reserve FRED database, and find data on the M1 Money Stock (M1SL), M1 Money Velocity (M1V), and Real GDP (GDPC1). Convert the M1SL data series to "quarterly" using the
Go to the St. Louis Federal Reserve FRED database, and find data on the budget deficit (FYFSD), the amount of federal debt held by the public (FYGFDPUN), and the amount of federal debt held by the
"When the stock market rises, investment spending is increasing." Is this statement true, false, or uncertain? Explain your answer.
"The fiscal stimulus package of 2009 caused the IS curve to shift to the left, since output decreased and unemployment increased after the policies were implemented." Is this statement true, false,
When the Federal Reserve reduces its policy interest rate, how, if at all, is the IS curve affected? Briefly explain.
Suppose you read that prospects for stronger future economic growth have led the dollar to strengthen and stock prices to increase. a. What effect does the strengthened dollar have on the IS
Why is inventory investment counted as part of aggregate spending if it isn't actually sold to the final end user?
"Since inventories can be costly to hold, firms' planned inventory investment should be zero, and firms should acquire inventory only through unplanned inventory accumulation." Is this statement
If households and firms believe the economy will be in a recession in the future, will this necessarily cause a recession, or have any impact on output at all?
Why do increases in the real interest rate lead to decreases in net exports, and vice versa?
Why does equilibrium output increase as the marginal propensity to consume increases?
If firms suddenly become more optimistic about the profitability of investment and planned investment spending rises by $100 billion, while consumers become more pessimistic and autonomous consumer
In each of the cases below, what happens to equilibrium output? Briefly explain how it affects the relevant component(s) of planned spending. a. The real interest rate rises. b. The marginal
Go to the St. Louis Federal Reserve FRED database, and find data on Personal Consumption Expenditures (PCEC), Personal Consumption Expenditures: Durable Goods (PCDG), Personal Consumption
Go to the St. Louis Federal Reserve FRED database, and find data on Real Private Domestic Investment (GPDIC1), a measure of the real interest rate; the 10-year Treasury Inflation-Indexed Security,
When the inflation rate increases, what happens to the federal funds rate? Operationally, how does the Fed adjust the federal funds rate?
"Autonomous monetary policy is more effective at changing output when λ is higher." Is this statement true, false, or uncertain? Explain your answer.
If net exports were not sensitive to changes in the real interest rate, would monetary policy be more or less effective in changing output?
What would be the effect of an increase in U.S. net exports on the aggregate demand curve? Would an increase in net exports affect the monetary policy curve? Explain.
Why does the aggregate demand curve shift when "animal spirits" change?
If government spending increases and taxes are raised to keep the budget balanced, what happens to the aggregate demand curve?
Suppose that government spending is increased at the same time that an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve?
"If f̅ increases, then the Fed can keep output constant by reducing the real interest rate by the same amount as the increase in financial frictions." Is this statement true, false, or uncertain?
Assume that the monetary policy curve is given by r = 1.5 + 0.751π.a. Calculate the real interest rate when the inflation rate is 2%, 3%, and 4%.b. Draw a graph of the MP curve, labeling the points
What is the key assumption underlying the Fed's ability to control the real interest rate?
Why does the MP curve necessarily have an upward slope?
If λ = 0, what does this imply about the relationship between the nominal interest rate and the inflation rate?
How does an autonomous tightening or easing of monetary policy by the Fed affect the MP curve?
How is an autonomous tightening or easing of monetary policy different from a change in the real interest rate caused by a change in the current inflation rate?
Suppose that a new Fed chair is appointed and that his or her approach to monetary policy can be summarized by the following statement: "I care only about increasing employment. Inflation has been at
"The Fed decreased the fed funds rate in late 2007, even though inflation was increasing. This action demonstrated a violation of the Taylor principle." Is this statement true, false, or uncertain?
A measure of real interest rates can be approximated by the Treasury Inflation-Indexed Security, or TIIS. Go to the St. Louis Federal Reserve FRED database, and find data on the five-year TIIS (FII5)
A measure of real interest rates can be approximated by the Treasury Inflation-Indexed Security, or TIIS. Go to the St. Louis Federal Reserve FRED database, and find data on the five-year TIIS (FII5)
Internet sites that enable people to post their resumes online reduce the costs of job searches. How do you think the Internet has affected the natural rate of unemployment?
If the unemployment rate is above the natural rate of unemployment, holding other factors constant, what will happen to inflation and output?
What happens to inflation and output in the short run and the long run when government spending increases?
What factors led to decreases in both the unemployment and inflation rates in the 1990s?
Are there any "good" supply shocks?
Why did the Federal Reserve pursue inherently recessionary policies in the early 1980s?
In what ways is the Volcker disinflation considered a success? In what ways is it considered a failure?
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