FI 301 Ch. 5 – Flashcards

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True
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The Fed can affect the interaction between the demand for money and the supply of money to influence interest rates, the aggregate level of spending, and therefore economic growth.
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increase; increasing
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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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creditors restrict the amount of loans they are willing to provide.
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A credit crunch occurs when:
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False
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According to the theory of rational expectations, higher inflationary expectations businesses and households to reduce their demand for loanable funds.
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False
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A passive monetary policy adjusts money supply automatically in response to economic conditions.
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True
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If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated from the Fed's target inflation rate, the Fed could lose credibility.
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an inverse relationship between unemployment and inflation.
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In general, there is:
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loose; tight
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A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation.
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stimulate; place upward pressure on
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A loose money policy tends to ____ economic growth and ____ the inflation rate.
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True
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When both inflation and unemployment are relatively high, there is more disagreement among FOMC members about the proper monetary policy to implement.
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Gross domestic product (GDP)
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____ serves as the most direct indicator of economic growth in the United States.
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consumer confidence surveys
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Which of the following is not an indicator of inflation?
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leading
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The ____ indicators tend to occur before a business cycle.
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lagging
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The ____ indicators tend to occur after a business cycle.
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coincident
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The ____ indicators tend to occur before a business cycle.
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recognition lag.
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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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implementation 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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impact 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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False
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If the Fed attempts to reduce inflation, it would likely increase money supply growth.
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upward; upward
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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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False
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The Fed is usually more willing to monetize the debt when inflation is relatively high.
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outflows; tight
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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 fee compelled to use a ___monetary policy.
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uses a tight-money policy.
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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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recognition
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The ____ lag represents the time from when an economic problem exists until it is recognized.
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weak
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A ____ dollar tends to exert inflationary pressure in the U.S.
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higher; increase
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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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increase; upward
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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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it allows the economy to fix itself.
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If the Fed uses a passive monetary policy during weak economic conditions,
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high level of aggregate demand.
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Inflation is commonly the result of a
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the impact on interest rates can not be determined.
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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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low and steady.
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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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an excessive budget deficit in one country on interest rates of another country.
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Global crowding out is described in the text to mean the impact of
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the crowding-out effect.
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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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an outward shift in the supply schedule of loanable funds.
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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 inward 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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The Fed's complete focus on inflation could result in much higher interest rates, which would discourage economic growth.
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Which of the following is not a disadvantage of inflation targeting?
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unfavorably; increases
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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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False
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According to the theory of rational expectations, higher inflationary expectations encourage businesses and households to reduce their demand for loanable funds.
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False
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A passive monetary policy adjusts money supply automatically in response to economic conditions
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True
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If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated substantially from the Fed's target inflation rate, the Fed could lose credibility.
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False
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If the Fed attempts to reduce inflation, it would likely increase money supply growth.
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False
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The relationship between the interest rate on loanable funds and the level of business investment is positive.
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False
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The supply schedule of loanable funds indicates the quantity of funds that would be demanded at various possible interest rates.
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False
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To correct excessive inflation, the Fed could use open market operations by buying Treasury securities in the secondary market.
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True
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One of the disadvantages of inflation targeting is that the Fed could lose credibility is the U.S. inflation rate deviates substantially from the Fed's target inflation rate.
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True
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Economists who work at the Fed recognize that a stimulative monetary policy will not always cure a high unemployment rate and could even ignite inflation.
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True
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An attempt by the Fed to stimulate the economy by reducing short-term interest rates may have a limited effect if long-term interest rates remain unaffected.
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False
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The Fed needs the approval of the presidential administration to make decisions.
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True
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The Fed is more likely to use a stimulative policy during a strong-dollar period.
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Decrease, increase
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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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high interest rates
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Which of the following is probably not a goal the Fed is trying to achieve consistently?
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producer price index
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The ____ is not an indicator of economic growth.
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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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Which of the following is not true with respect to inflation targeting?
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lagging
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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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U.S. exports; U.S. imports; stimulate
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A weak dollar would stimulate ____, discourage ____, and ____ the U.S. economy.
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