Questions and Answers of Financial System Of The Economy

what is accounting
what is accounting
Over time, as our financial system expands and develops additional sources of financing for small- to medium-sized firms, such as assetbacked securities, would the bank lending channel become larger
Would you expect the bank lending channel of monetary policy to have a larger or a smaller effect in emerging economies, such as Brazil or India, than in the United States? Briefly explain.
In the bank lending channel, an expansionary monetary policy is not dependent for its effectiveness on a reduction in interest rates, and a contractionary monetary policy is not dependent for its
When the Federal Reserve changes the real interest rate to affect the output gap and inflation rate, do the bank lending channel and the balance sheet channel reinforce or partially negate the effect
What is the balance sheet channel? How does an increase in interest rates reduce a firm’s net worth? How does a reduction in a firm’s net worth affect the cost of external funding, particularly
What is the bank lending channel? What key economic fact does this channel focus on?
What is the interest rate channel?
What do economists mean by the channels of monetary policy?
[Related to the Chapter Opener on page 546]In an article titled “The Strategy of Monetary Policy,” Professor Alan Blinder, then Vice Chairman of the Board of Governors of the Federal.Reserve
[Related to Solved Problem 18.3 on page 569]Suppose the Fed is concerned that deflation would harm the economy over the long run. Use the IS–MP model (including the output gap Phillips curve in all
[Related to the Making the Connection on page 568] Chapter 17 discussed whether the Federal Reserve and the government should attempt to “fine-tune” the economy—smooth almost every fluctuation
[Related to the Making the Connection on page 564] John Hicks, in his original macroeconomic model, the IS–LM model, developed the LM curve to show the combinations of the real interest rate and
[Related to the Making the Connection on page 564] John Maynard Keynes and John Hicks developed a model of the economy in which total output is determined solely by total spending with little or no
Use the IS–MP model (including the output gap Phillips curve) to analyze how the Federal Reserve would respond to a significant positive demand shock. Assume that the economy was in long-run
What is the default risk premium, and why did it dramatically increase during the 2007–2009 recession? How did this increase affect the MP curve and the output gap?Problems and Applications
When the Federal Reserve lowers the real interest rate, what happens to the output gap and to the actual inflation rate?
When the Federal Reserve lowers the real interest rate, does the MP curve shift? Does the IS curve shift? Does the output gap Phillips curve shift? Briefly explain.
Draw graphs showing long-run macroeconomic equilibrium in the IS–MP model. One of your graphs should show the output gap version of the Phillips curve. In long-run equilibrium, what does the output
Structural changes in the construction industry and the automobile industry in the mid- to late 2000s, as explained in Chapter 17, may have resulted in a new higher natural rate of unemployment. How
Why does the inverse relationship between the inflation rate and the unemployment rate on the Phillips curve hold only in the short run? In the long run, what happens when the actual inflation rate
The natural rate of unemployment is sometimes referred to as the non accelerating inflation rate of unemployment. Using Phillips curve analysis, if the unemployment rate differs from the natural rate
If households and firms change from expecting mild inflation to expecting mild deflation, how will the Phillips curve shift? Draw an output gap Phillips curve graph to illustrate your answer.
[Related to the Making the Connection on page 562] A columnist in the New York Times writes: “So, according to Okun’s Law, the unemployment rate should have gone from 7.4 percent at the start of
In each of the following situations, briefly explain whether the short-run Phillips curve with the unemployment rate on the horizontal axis will shift, and if it does shift, in which direction it
In a column in the New York Times, Harvard economist Edward Glaeser argues: “Theory and data both predict that the 1.2 percentage point drop in real interest rates that America experienced between
A columnist in the Wall Street Journal argues:“Whether you’re a borrower or a saver, what matters isn’t the nominal interest rate but the‘real,’ post-inflation rate of return.” Do you
What is Okun’s law? How can Okun’s law be used to derive an output gap Phillips curve?
What factors cause the Phillips curve to shift?
What is the Phillips curve? Why is there an inverse relationship between inflation and unemployment? On the Phillips curve, when the unemployment rate equals the natural rate of unemployment, what
When the Federal Reserve raises the real interest rate, does the economy move up or down the IS curve, and does the value of the output gap increase or decrease?
What is the MP curve? Why is it a horizontal line? How is the Fed able to change the position of the MP curve?
How can changes in the federal funds rate, which is a short-term nominal interest rate, cause changes in short-term real interest rates? How can changes in the federal funds rate cause changes in
Some economists believe that during a recession, business demand for investment in factories, office buildings, and machinery becomes less sensitive to changes in the real interest rate.If these
Other than in response to changes in real interest rates, if the aggregate expenditure line shifts in the 45°-line diagram, must the IS curve shift also? Briefly explain.
How would the size of the multiplier affect the slope of the IS curve? (Hint: In the 45°-line diagram, how does the multiplier affect the change in the equilibrium level of real GDP for a given
In each of the following situations, briefly explain whether the IS curve will shift and, if it does shift, in which direction it will shift:a. Consumers become more optimistic about their future
Why does a change in the real interest rate shift the aggregate expenditure line in the 45°-line diagram, but not shift the IS curve?
Briefly explain whether you agree with the following argument:Potential GDP is the level of real GDP attained when all firms are producing at capacity. Firms have the capacity to operate 24 hours per
[Related to Solved Problem 18.1 on page 552]Use the following data to calculate the values of equilibrium output and the investment spending multiplier: C=MPC X Y = 0.75 X Y I = $2.3 trillion G $1.7
What is potential GDP? What is the output gap?Problems and Applications
What is the IS curve? What causes a movement along the IS curve? What causes the IS curve to shift?
What is the multiplier? Briefly describe the multiplier effect. What is the MPC? What is the relationship between the MPC and the multiplier?
Draw a 45°-line diagram showing an equilibrium in the goods market. Label the equilibrium level of real GDP, Y1. Now show on your graph the situation when real GDP is equal to Y2, where Y2 is
What are inventories? Briefly explain what happens to the level of inventories when aggregate expenditure is greater than real GDP, what happens when aggregate expenditure is less than real GDP, and
Define the following terms:a. IS curveb. MP curvec. Phillips curve
Discuss alternative channels of monetary policy (pages 571–573)18A Use the IS-LM model to illustrate macroeconomic equilibrium (pages 582–584)
Use the IS–MP model to illustrate macroeconomic equilibrium (pages 563–571)
Explain the significance of the MP curve and the Phillips curve (pages 557–563)
Understand what the IS curve is and how it is derived (pages 547–557)
In April 2010, Christina Romer, who was then serving as chair of the President’s Council of Economic Advisers, argued: “The overwhelming weight of the evidence is that the current very high—and
[Related to the Making the Connection on page 535] Economist Robert Gordon has written the following:During 1939, more than any other year in the dismal Depression decade, the American economy
[Related to the Making the Connection on page 535] Writing in the New York Times, economist Tyler Cowen of George Mason University argued: “In short, expansionary monetary policy and wartime orders
[Related to the Chapter Opener on page 514]In a speech in September 2010, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis noted:The job openings rate has risen by about 20
Normally we think of the factors that cause the AD curve to shift as different from the factors that cause the LRAS curve to shift. Is this still true in the case of hysteresis? Briefly explain.
[Related to the Solved Problem 17.4 on page 532] Assume that the economy is initially in equilibrium at potential GDP. Then suppose that the economy is hit simultaneously with a positive aggregate
Given that the economy can correct itself and return to potential GDP, why would the Federal Reserve pursue expansionary monetary policy following a negative aggregate demand shock?How could the Fed
The Federal Reserve can use expansionary or contractionary policy to shift the aggregate demand curve. Use an AD-AS graph to show how monetary policy should be used to return output to potential GDP
What is hysteresis, and what problems does it pose for the economy?Problems and Applications
What policies might the Federal Reserve use to counteract an aggregate demand shock?
Why might attempts to fine-tune the economy be ineffective? Instead of fine-tuning, what do economists generally advocate that policymakers do?
What is stabilization policy? What curve in the aggregate demand and aggregate supply model does stabilization policy attempt to shift?
What is the business cycle?
Assume that the economy is initially in equilibrium at potential GDP. Suppose that there is a decrease in income in Europe that causes a decrease in demand for U.S.-produced goods. Use an AD-AS graph
Assume that the economy is initially in equilibrium at potential GDP. Use an AD-AS graph to show the effect of an increase in government purchases on the price level and the output level in the short
Suppose that in Year 1 the price level equals 110 and the output level equals $14 trillion and that in Year 2 the price level equals 104 and the output level equals $13 trillion. In the AD-AS model,
An article in the Economist magazine observed:“Creating more inflation is harder than it sounds. . . . It requires aggregate demand to return to, and exceed, potential output.” Use an AD-AS graph
Can the economy be in a short-run macroeconomic equilibrium without being in a long-run macroeconomic equilibrium? Can the economy be in a long-run macroeconomic equilibrium without being in a
What is monetary neutrality?Problems and Applications
Briefly explain whether the adjustment by the economy from short-run equilibrium to longrun equilibrium is more rapid in the new classical view or in the new Keynesian view.
Suppose that the economy is initially in equilibrium at potential GDP. If there is a decrease in aggregate demand, use an AD-AS graph to show the effects on the price level and the output level in
When the economy is in a short-run equilibrium, with output greater than potential GDP, what will happen to the short-run aggregate supply curve? Briefly explain why this happens.
In a graph illustrating the AD-AS model, where does short-run equilibrium occur, and where does long-run equilibrium occur? At what level of output does long-run equilibrium occur?
[Related to the Making the Connection on page 523] During the period of Communist rule in Eastern Europe, the governments imposed wage and price controls. Under these controls, some prices were
If the long-run aggregate supply curve shifts, does the short-run aggregate supply curve also have to shift? If the short-run aggregate supply curve shifts, does the long-run aggregate supply curve
An article in the Economist magazine noted: “the economy’s potential to supply goods and services [is] determined by such things as the labour force and capital stock, as well as inflation
Writing in the New York Times, Tyler Cowen of George Mason University argued that an investment tax credit, which allows firms to reduce their taxes by some fraction of their spending on new physical
Show graphically the effect of each of the following on the short-run aggregate supply curve:a. A decrease in the expected price levelb. A decrease in oil pricesc. The development of personal
Use the equation Y = YP + a(P - Pe) to explain why in the new classical view, the short-run aggregate supply curve is positively sloped and the long-run aggregate supply curve is vertical.
What factors shift the long-run aggregate supply curve?Problems and Applications
What factors shift the short-run aggregate supply curve?
What is meant by the term price stickiness in the new Keynesian view? What explains price stickiness?
In the new classical view, why can’t firms distinguish between increases in the general price level and increases in the relative prices of their products?
What is aggregate supply? How do the slopes of the short-run aggregate supply curve and the long-run aggregate supply curve differ?
Shortly before leaving her position as chair of the President’s Council of Economic Advisers in the Obama administration, Christina Romer observed: “The only surefire ways for policymakers to
In the early to mid-2000s, stock prices and housing prices rose substantially. What effect would these increases in household wealth have on the savings rate and on consumption spending?How would the
Use a graph of the demand and supply for real balances to show the effect of an open market purchase of U.S. Treasury securities by the Federal Reserve. Using the result from your graph to explain
In the market for money, use a graph to explain the effect of a decrease in the price level on the equilibrium interest rate. How does the change in the interest rate affect planned investment
Why doesn’t an increase in the price level shift the demand curve for real money balances to the right? Don’t firms and households demand more money as prices rise?
Briefly explain whether each of the following shifts the aggregate demand curve to the right or to the left.a. The Federal Reserve sells $10 billion of U.S.Treasury securities.b. The federal
How does an increase in the interest rate affect each of the following types of spending on aggregate output?a. Investment spending by firms on plant and equipmentb. Consumption spending by
What are real money balances? What is the primary reason that households and firms demand money? Why is the demand for real money balances downward sloping?
Why is the AD curve downward sloping?
What is aggregate expenditure? Briefly describe each of the four components of aggregate expenditure.
Use the aggregate demand and aggregate supply model to show the effects of monetary policy (pages 530–536)
Demonstrate macroeconomic equilibrium using the aggregate demand and aggregate supply model (pages 526–530)
Explain how the aggregate supply curve is derived (pages 520–525)
Explain how the aggregate demand curve is derived (pages 516–519)
In early 2010, arguing that the Chinese yuan was overvalued versus the U.S. dollar, President Barack Obama said he wanted “to make sure our goods are not artificially inflated in price and their

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