chapter 5 finance 421

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The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply.
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increase; increasing
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A credit crunch occurs when:
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creditors restrict the amount of loans they are willing to provide.
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in general, there is:
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an inverse relationship between unemployment and inflation.
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A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation.
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loose; tight
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A loose money policy tends to ____ economic growth and ____ the inflation rate.
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stimulate; place upward pressure on
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____ serves as the most direct indicator of economic growth in the United States.
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Gross domestic product (GDP)
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Which of the following is not an indicator of inflation?
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consumer confidence surveys
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The ____ indicators tend to occur before a business cycle.
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leading
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The ____ indicators tend to occur after a business cycle.
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lagging
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The time lag between when an economic problem arises and when it is reported in economic statistics is the
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recognition lag.
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The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the
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implementation lag.
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The time between when the Fed adjusts the money supply and when interest rates change reflects the
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impact lag.
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Which of the following best describes the relationship between the Fed and the Administration?
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none of the above
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A high budget deficit tends to place ____ pressure on interest rates; the Fed’s tightening of the money supply tends to place ____ pressure on interest rates.
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upward; upward
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International flows of funds can affect the Fed’s monetary policy. For example, if there is downward pressure on U.S. interest rates that can be offset by foreign ____ of funds, the Fed may not feel compelled to use a ____ monetary policy.
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outflows; tight
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Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed:
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uses a tight-money policy.
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The ____ lag represents the time from when an economic problem exists until it is recognized.
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recognition
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A ____ dollar tends to exert inflationary pressure in the U.S.
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weak
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According to the theory of rational expectations, ____ inflationary expectations encourage businesses and households to ____ their demand for loanable funds in order to borrow and make planned expenditures increase.
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higher; increase
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Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.
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increase; upward
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If the Fed uses a passive monetary policy during weak economic conditions,
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it allows the economy to fix itself.
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Which of the following is true?
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None of the above.
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Inflation is commonly the result of a
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high level of aggregate demand.
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According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, the ultimate effect on interest rates is definitely
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the impact on interest rates cannot be determined.
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The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are
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low and steady.
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Global crowding out is described in the text to mean the impact of
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an excessive budget deficit in one country on interest rates of another country.
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If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects
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the crowding-out effect.
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When the Fed uses open market operations by purchasing Treasury securities from various financial institutions in the U.S., there will be
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an outward shift in the supply schedule of loanable funds.
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When the Fed uses open market operations by selling some of its Treasury securities to investors in the U.S., there will be
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an inward shift in the supply schedule of loanable funds.
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Which of the following is not a disadvantage of inflation targeting?
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The Fed’s complete focus on inflation could result in much higher interest rates, which would discourage economic growth.
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Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is ____ affected when the Fed ____ interest rates.
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unfavorably; increases
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A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the level of business investment.
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decrease; increase
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Which of the following is probably not a goal the Fed is trying to achieve consistently?
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high interest rates
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The ____ is not an indicator of economic growth.
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producer price index
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Which of the following is not true with respect to inflation targeting?
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If unemployment is slightly higher than normal, while inflation is at the peak of the target range, and inflation targeting approach would like advocate a loose monetary policy.
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A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions.
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lagging
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A weak dollar would stimulate ____, discourage ____, and ____ the U.S. economy.
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U.S. exports; U.S. imports; stimulate
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The interest rate that the Fed targets for its monetary policy is the:
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federal funds rate.
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When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _________, and there are _________ in the account balances of other financial institutions.
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increase; no offsetting decreases
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The Fed’s monetary policy is commonly intended to alter the supply of funds in the banking system in order to achieve a specific targeted:
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federal funds rate.
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If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________.
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7 percent; 9 percent
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In the “operation twist” strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities.
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short-term; long-term
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The intent of the Fed’s operation twist strategy in 2011 and 2012 was to:.
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reduce long-term interest rates.
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Which of the following is not a reason that a stimulative monetary policy may be ineffective?
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Higher interest rates encourage individuals to increase their savings.
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Which of the following was not true of the eurozone during the Greek crisis?
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Greece, Spain, and Portugal focused their efforts on reducing tax rates in order to stimulate their economies.

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