Exam 14: The Great Recession and the Short-Run Model

Deflation usually arises due to __________.This in turn __________ interest rate,which __________.

Adding the risk premium to the AS/AD model is represented by a downward movement along the AD curve.

For the following questions refer to Figure 14.3 below. -The effect of the subprime loan crisis pushed the __________.In Figure 14.3,this is shown as a movement from point __________ to __________.

Between approximately 2001 and 2006,the Taylor rule predicted federal funds rate:

The rapid growth of money supply, And ,was due,in part,to the

The risk premium:

According to the Fisher equation,the real interest rate is:

Use the figure below for the following questions;it shows the BAA corporate and 10-Year Treasury Bond yields. -Consider Figure 14.1.What event likely caused the risk premium to jump to about 6 percent?

Refer to Figure 14.4 below,which shows the inflation rate and ten-year bond yield,for the following questions. -To eradicate deflation during the Great Depression,the Fed __________ and __________.

The Troubled Asset Relief Program was originally designed to nationalize banks but funds were ultimately used for unemployment insurance and financing the wars in Iraq and Afghanistan.

In the IS-MP framework,when the Fed __________ the federal funds rate in the aftermath of the decline in housing prices,the risk premium gave rise to a(n)__________ in the real interest rate which caused a(n)__________.

When the Fed lowers the nominal interest rate to zero,what is the real interest rate?

Banks which are deemed too big to fail leads to adverse selection.

If the rate of inflation is 2 percent,the output gap is 0 percent,the nominal interest rate is 3 percent,and the unemployment rate is 10 percent,what is the real interest rate?

When inflation is negative it:

You are a newly hired reporter for the Daily Tribune and have been asked to track the Fed's Federal Open Market Committee (FOMC)to report what the likelymonetary policy will be.On April 28,2010 the FOMC statement reads: Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve.Growth in household spending has picked up recently but remains constrained by high unemployment,modest income growth,lower housing wealth,and tight credit.Business spending on equipment and software has risen significantly;however,investment in nonresidential structures is declining and employers remain reluctant to add to payrolls.Housing starts have edged up but remain at a depressed level.While bank lending continues to contract,financial market conditions remain supportive of economic growth.With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable,inflation is likely to be subdued for some time.(Press Release,FOMC,April 28,2010,source: federalreserve.gov/newsevents /press/monetary/20100428a.htm) What does the FOMC statement suggest the Fed thinks about current economic conditions and what it intends to do in the near future?

-Consider Figure 14.5 which shows the ten-year bond yield (line with diamonds)and the yield on BAA corporate bonds (line),to answer the following questions. a.What is the difference between the two yields referred to? Explain. b.What caused the sharp divergence between these two yields in late 2008? Explain. c.Explain the dynamics of the decline in 10-year bond yield and the increases in the BAA bond yield during that time.

In the AS/AD framework,the risk premium appears as a(n):

In the aftermath of the financial crisis that began in 2008,the Fed's assets grew primarily as:

Use the figure below for the following questions;it shows the BAA corporate and 10-Year Treasury Bond yields. -Consider Figure 14.1 above.The difference between these two curves can be interpreted as: