Week 5 quiz
1. In the U.S. current account, most of the trade deficit results from an excess of imported
B. merchandise
2. What is the difference between the balance of trade and the balance of payments?
A. The balance of trade is only part of the balance of trade.
3. If a government has implemented significantly higher trade tariffs, but does not want this action to affect the value of its currency, it will
B. buy foreign currency because the tariffs will tend to make the domestic currency appreciate
4. During 2007, the United States and Japan announced possible limits on Chinese imports through higher tariff rates on Chinese products. To avoid these limits, China would have to
D. increase the value of the yuan and
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more money because prices will likely fall
2. The interest rate is the price paid for the use of a
D. financial asset
3. Which of the following do policy makers tend to target when setting monetary policy?
B. Interest rates
4. If the Federal Reserve reduced its reserve requirement from 6.5 percent to 5 percent, this policy would most likely
A. Increase both the money multiplier and the money supply
5. If banks hold excess reserves whereas before they did not, the money multiplier
B. will become smaller
6. The process of money multiplier depends on
B. the banks holding all the currency
7. Quantitative easing refers to
D. non-standard monetary policy design to extend credit in the economy
8. If the Fed wants an easier monetary policy, it might
D. buy government securities to reduce the federal funds rate
9. When the Fed raised the interest rates between 2004 and 2007, the Federal Reserve
B. sold U.S. government securities, thereby contracting funds to the federal funds market
WEEK 2 QUIZ
1. The globalized AS/AD curve is the standard AS/AD model with an added
C. world supply curve
2. According to Say 's Law, people
A. supply goods in order to obtain other good
3. A shift in the long-run aggregate supply curve will change
C. both output and the price level
4. The hypothesis about the macroeconomy that sees the recent problems with the U.S. economy directly
The current state of the U.S. macro economy is made up of a plethora of highly involved processes. I am going to attempt to explain some simple terms and concepts focused on international trade and foreign exchange rates.
One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a
The Fed makes these debt transactions with banks in order to alter total reserves in the banking system. The Fed uses three tools of monetary policy, trying to influence the amount of reserves in private banks. They are Open Market Operations, Discount Rate and Reserve requirements. Open market operations are purchases and sales of U.S. Treasury and federal agency securities. This is the Federal Reserve’s principal tool for implementing monetary policy. The Federal Reserve’s objective for open market operations has varied over the years. In the 1980’s the focus shifted toward attaining a specified level of the federal funds rate. This process was largely complete by the end of the decade. Discount rate is the interest rate charged to commercial banks and other depository institutions or loans they receive from their regional Federal Reserve Bank’s lending facility. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.
The third option to solve balance of payment problem was to impose trade barriers and capital control. On one hand, this would help to restrict import and capital outflow, thereby recover the trade deficit. On the other hand, this policy was contrary to U.S. effort to liberalize the world trade. Economic growth of the U.S and its allies would also be affected.
15. What is the primary role of the Federal Reserve? What is the significance of this role?
Monetary policy is the process of the monetary authorities of a country primarily controlling the supply of money available, often targeting a certain rate of interest for the main purpose of promoting economic growth and stability. The Main Official goals usually include relatively stable prices with low unemployment. Discretionary monetary policy on the other hand, uses the Federal Reserve to increase the money supply; this is made possible by manipulating the four tools we learned about. The Federal Reserve uses open market operations when they have to purchase the
(3) Reducing the value of the dollar against foreign currencies. That mean selling dollar would cause the value of the dollar to fall. When the value of the dollar falls it makes U.S. imports more expensive, therefore the demanded of imports will fall.
Monetary policy has become more common now then how it used to be. The Federal Reserve has what is commonly referred to as a "dual mandate", to achieve maximum employment, in practice, around 5% unemployment, and stable prices 2-3% inflation. In this role, it lends to eligible banks at the so-called discount rate, which in turn influences the Federal funds rate (the rate at which banks lend to each other) and interest rates on everything from savings accounts to student loans, mortgages and corporate bonds In conclusion, Economic policies are the solutions that governments bring to the macroeconomic problem. Yet good policies are hard to find. A bad policy may be worse than nothing at all. Supply-side economic have been long recognized the importance of an economy's productive capacity, it's stock of labour and capital. Demand-side economic s has supported the government for the longest time ever, and has also increased many prices. Monetary policy has influenced the Federal
It is often suggested that the large current account deficit poses a serious financing problem for the United States. Each year, the lament goes, the United States must attract net inflows of capital sufficient to "cover" the huge current shortfall. But this proposition gets the logic backward: the U.S. deficit is "financed" by net capital inflows only in an ex post accounting sense. In economic terms it is more nearly correct to say that net capital inflows cause the current account deficit. (p. 218)
a reduction in trade deficits by two hundred to five hundred billion dollars with the help of these three steps. The first step recommends Congress to pass a legislation to define currency manipulation as an illegal contribution and allow the Commerce Department to address it in countervailing duty complaints. This step would send out the message that the U.S. is ready to confront this issue and aid importers that were hurt by any unjust competition from imports. The second step is to address the issue of currency manipulation in future trade agreements, such the Trans-Pacific Partnership. Ideas addressed in these future trade agreements include the agreement of members to not participate in currency manipulation, but if this is violated the members would suffer penalties that would end their benefits. The last step to end this issue is to balance or tax foreign assets by currency manipulators, which will cause currencies too costly to
This paper will analyze the behavior of the FED before, during and after the most recent recession. The analysis will begin in 2003 and continue through 2013. This paper will be divided into three parts. First, it will analyze the economic situation the FED faced in the time period aforementioned. Second, it will explain the FED’s actions during this time period, focusing on various monetary tools discussed in class. Third, it will explain whether the author thinks that the FED acted appropriately given the economic situation. It will consider six variables: the civilian unemployment rate, the personal consumption expenditures chain-price index, the M2 money stock, the velocity of the M2 money stock, the effective federal funds rate and
12. No, since people who are saving money will earn more money than when the interest rates are lower. The people who are hurt by this are the borrowers.
The U.S should continue trading with China because both countries benefit from it. Although the trade in goods has not been favorable to the U.S due to China comparative advantage in the sector, the U.S will find almost the same outcome trading with other nations. The U.S has lost its comparative advantage in many sectors that required labor intensity. Hence, China should not be seen as the cause of that loss. That is what happens in a free trade based on different factors. China is the third
The issue of the trade deficit is not normally a worrying problem, especially since the trade balance tends to gain equilibrium over time. Within the United States however, the deficitary balance of trade has been maintained for decades now, leading to concerns among the economists. Their main concern is linked to the fact that high volumes of imports result in high volumes of dollars exiting the United States. This subsequently translates into a potential weakening of the national currency as a result of its increasing sensitivity to international parties owning and deciding on how to spend US dollars (Investopedia, 2012).