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Economics 2150A/B Study Guide - Quiz Guide: Procyclical And Countercyclical, Foreign Exchange Market, Monetary Policy

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6 Oct 2018
School
Western University
Department
Economics
Course
Economics 2150A/B
Professor
Colin Denniston

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ECON 2150A/B Full Course Notes
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ECON 2150A/B Full Course Notes
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Document Summary

Crucial: policy measures are temporary and do not influence expectations about the future. Fiscal policy: government changes government expenditures and taxes. Moflefi: monetary policy with flexible exchange rates works fine (fiscal policy doesn"t). Foreign exchange market: decrease in r decreases demand for domestic deposits and domestic currency. The domestic currency depreciates: e increases for given y. Goods market: increases in e makes domestic goods relatively cheaper, demand for domestic goods and production increase. Move on dd-curve to the right/upwards (no shift of dd-curve since positive relationship between e and y is already represented by the positive slope of the dd- curve). Goods market: demand and production of domestic goods increases. Money market: real money demand increases due to increase in y. r increases for equilibrium on the money market. Foreign exchange market: the increase in nominal interest rate r increases demand for domestic deposits and currency domestic currency appreciates (e decreases).

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Related Questions

A. In a small open economy in a flexible exchange rate system with perfect capital mobility, there is complete ________ crowding-out of ________ policy.

a) domestic, monetary

b) domestic, fiscal

c) international, fiscal

d) international, monetary

B. If the dollar depreciates against the yen, this tends to ________ our imports of Japanese goods and ________ our exports of goods to Japan, so that our net exports ________.

a) decrease, decrease, decrease

b) increase, decrease, are unchanged

c) decrease, increase, increase

d) decrease, increase, are unchanged

E) increase, increase, increase

C. An increase in the nominal money supply will shift

a) AD up and raise the price level.

b) SAS down and lower the price level.

c) SAS up and raise the price level.

d) AD down and lower the price level.

D. A rise in the price level causes

a) movement down along an LM curve.

b) movement up along an LM curve.

c) the LM curve to shift downward.

d) the LM curve to shift upward.

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending.Ā 

Ā 

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

Ā 

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. noĀ change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

Ā 

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

Ā 

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

Ā 

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

Ā 

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

Ā 

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______Ā investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decreaseĀ 

Ā 

Multiple Choice

1. Assume that the money multiplier equals 2.5 and if the Fed purchases $10 million in bonds from a bank, the monetary supply will:

  1. Increase by $10 million.
  2. Increase by $25 million.
  3. Decrease by $10 million.
  4. Decrease by $25 million.

2. The monetary base is defined as:

  1. all currency in circulation.
  2. checkable deposits at depository institutions.
  3. excess reserves in the banking system.
  4. currency plus total banking reserves.

3. Which of the following means of financing federal government spending will increase the monetary base?

  1. raising the corporate income tax.
  2. raising the personal income tax.
  3. selling bonds to the public.
  4. selling bonds to the Fed.

Short Answer

1. Assume the Federal Reserve Board is undertaking an expansionarymonetary policy. Explain the details of how the expansionary Fed impacts each of the following:

  1. Open market operations - how does the Fed use open market operations for an expansionary monetary policy?
  2. The monetary base.
  3. Money Supply.
  4. Fed funds interest rate.
  5. Long-term interest rates.
  6. Business Investment.
  7. Aggregate demand.
  8. Economic growth.
  9. Unemployment rate.

2. Under certain circumstances, expansionary Fed policy may not have much of an effect on the rate of economic growth. Give a reason why, and explain?

3. Regarding the Asian currency crisis, answer the following questions:

  1. Describe the normal reasons why a currency undergoes a significant depreciation and what were the important characteristics of the Asian countries involved in the crisis?
  2. What are some expected domestic economic consequences of the currency crisis for the countries involved? Focus on:
    • import prices of goods and services into the Asian country.
    • export prices of goods and services from the Asian country.
    • Domestic inflation rates.
  3. Assume that the countries involved undertake a tight monetary policy and raise interest rates in response to the crisis. What are the two primary reasons for raising interest rates in their case?
  4. Given high domestic interest rates, what is the economic outlook for these Asian countries in the next few years?