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

The liquidity trap occurs when:

According to Federal Reserve Bank of Minneapolis president Narayana Kocherlakota, modern macroeconomics has been limited by:

The burst of the housing bubble can be represented in the IS/MP model as a rise in .

Banks that are deemed too big to fail lead to adverse selection.

An explanation for the low federal funds rate in 2003 was:

To identify an asset bubble, economists and analysts frequently rely on:

When inflation is negative it:

Figure 14.5: Moody's Corporate BAA and 10-Year U.S. Bond Yields (Source: Federal Reserve Economic Data, St. Louis Federal Reserve) -Consider Figure 14.5 to answer the following questions. (a) What is the difference between the two yields? 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.

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 likely monetary policy will be. On December 12, 2012 the FOMC statement reads: To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. (Press Release, FOMC, December 12, 2012. Source: www.federalreserve.gov/newsevents/press/monetary/20121212a.htm) What does the FOMC statement suggest the Fed thinks about current economic conditions and what it intends to do in the near future?

The Taylor rule expresses the federal funds rate as the weighted average of:

The rapid growth of money supply, M1 and M2, between 2001 and 2006 was due, in part, to the:

The American Recovery and Reinvestment Act is an approximately ________ stimulus package. About ________ takes the form of tax cuts and ________ is from new government spending on ________.

Refer to the following figure when answering the following questions. Figure 14.3: AS/AD Model -Consider Figure 14.3. Between 2006 and 2007 the:

By linking bank executive compensation to long-term performance, ________ hopes to ________ in financial markets.

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

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

The European debt crisis hit all of the following countries very hard EXCEPT:

In response to the Great Recession, the federal government responded with ________ for the Troubled Asset Relief Program and ________ for the American Recovery and Reinvestment Act.

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

The Fed's holdings of mortgage-backed securities is shown in Figure 14.8, in billions of dollars. What is the cause of these changes in Fed holding of these assets?Figure 14.8: Fed Holdings of Mortgage Backed Securities (Source: FRED II)