Exam 3

Question 1

What does the federal open market committee do

Answer 1

• Determines and implements monetary policy
• Controls money supply
• Promotes stable prices and economic growth

Question 2

Functions of federal reserve

Answer 2

• Act as bankers bank
• Supervise and regulate member banks
• set the interest on reserve balances

Question 3

If the FOMC chooses contractionary stance ill federal finds increase or decrease

Answer 3

increase

Question 4

What happens to federal finds rate, market interest rate, quantity of investment demanded, and demand for reserves during contractionary monetary policy

Answer 4

• Increase federal funds rate
• Increase market interest rate
• Decrease quantity of investment demanded
• Increase demand for reserves

Question 5

Beliefs held by Keynes

Answer 5

• Governments should use expansionary fiscal policy to stabilize economy
• Wages are sticky downward but not upwards
• Markets are led by “animal spirits” that cause shocks to the economy
• Current consumption is based on current income
• Negative correlation between unemployment and inflation

Question 6

What are the 3 money uses

Answer 6

• Unit of account
• Medium of exchange
• Store of value

Question 7

3 types of money

Answer 7

• Commodity
• Fiat money
• Commodity-backed

Question 8

Commodity money

Answer 8

Actual physical commodity such as gold and silver

Question 9

Fiat money

Answer 9

Has no value except as a value of exchange
- Value assigned by government

Question 10

Commodity-backed money

Answer 10

exchanged for a commodity

Question 11

M1

Answer 11

Narrowest definition of money supply
- most liquid assets
- Checking and Saving accounts
- Currency

Question 12

M2

Answer 12

Broader definition including M1 (represents total money supply)
- Certificates of deposits
- money marked mutual funds
- Small-denomination time deposits

Question 13

Board of governors

Answer 13

• 7 members serving 14 year terms
• Based in Washington

Question 14

Federal open market committee

Answer 14

• Board of governors
• President of new York fed
• 4 rotating presidents

Question 15

IORB

Answer 15

• Primary tool of monetary policy
• Interest on the money that banks send to the fed
• Lowers incentive for banks to loan out money

Question 16

Prime rate

Answer 16

the lowest commercially available interest rate

Question 17

Administered rates

Answer 17

interest rate set by the fed. Not market determined rates

Question 18

Discount rate

Answer 18

interest banks pay on money borrowed directly from the fed
- ceiling of the federal funds rate

Question 19

Cyclical asymetry

Answer 19

AD more responsive to contraction then expansion

Question 20

Liquidity trap

Answer 20

Increasing money does not lower-interest rates

Question 21

Limitations to monetary policy

Answer 21

• Recognition lag
• Implementation lag
• Expectations reduce effect of policy
• Liquidity trap

Question 22

New classical

Answer 22

• economic model that assume perfectly competitive markets and rapid adjustments to a new equilibrium
• rapid adjustments

Question 23

Keynes introduced

Answer 23

• AD and AS
• Multiplier effect
• Sticky wages and prices

Question 24

5 economic goals

Answer 24

• Full employment
• Stability
• Growth
• Efficiency
• Equity

Question 25

Efficiency

Answer 25

Society gets the most satisfaction from available resources

Question 26

Conservative (What, Why, How, Where)

Answer 26

What: invisible hand Why: incentive How: Free market capitalism Where: nations with liberty

Question 27

Radical (What, Why, How, Where)

Answer 27

What: invisible synergy Why: The economy values people How: Democratic socialism Where: Freedom `

Question 28

Liberal (What, Why, How, Where)

Answer 28

What: Helpful hand Why: Creates creativity How: Fare market capitalism Where: fairness

Question 29

Economic functions of the government

Answer 29

- Maintain legal and social framework - Maintain competition - Provide public goods and services - Redistribute income - Correct externalities - Stabilize economy

Question 30

Conservative view of the role of government

Answer 30

Severely limited - National security - property rights - maintain infrastructure

Question 31

Liberal view of the role of government

Answer 31

Limited - conservative functions - regulate - stabilize - Ensure equity

Question 32

Radical view of government

Answer 32

- Liberal and conservative functions - facilitate community councils - collective ownership of resources and production - provide universal benefits