22. Describe the structure of the Federal Reserve. How many governors are on the board, and how long is each governor's term? Who appoints them? How many regional banks does the Fed have? 23. Is the role (or function) of the Fed only to conduct monetary policy (e.g. raise or lower interest rates)? Chapter 12 - The Federal Reserve and Monetary Policy W 24. Identify the three tools of monetary policy, and what the Fed would do to increase (or decrease) the (growth of the) money supply. 25. Explain the sequence of links connecting an expansionary monetary policy with interest rates, intended investment, aggregate expenditure, and output. 26. Suppose the economy is characterized by inflation problems and an unstable banking system. Use the quantity equation, M x V=P x Y. to answer the following questions: a What assumptions does the classical theory make about the variables in the quantity equation? b. What assumptions does monetarist theory make about the variables? c. What assumptions do Keynesian-oriented theories make? d How does monetarist theory use the quantity equation to explain the deflation and fall in output in the U.S. during the Great Depression? e. How might a Keynesian-oriented theorist use the quantity equation to explain the cause of hyperinflation? f. Provide two cases where inflation is caused by some factor other than an increase in the money supply. Problems 1. Suppose the Fed buys $5 million worth of government bonds from TrustMe bank. a. Show the changes in the Fed's Balance sheet, and the changes in TrustMe bank's balance sheet. b. How much in new loans can TrustMe Bank make, given this change in its balance sheet? (Assume the borrowers deposit the amount they borrow in other banks.) C. Assume that when the new loans are deposited in other banks in the banking system, all these banks loan out all of their excess reserves. Assume further that the money multiplier equals 2. By how much has the money supply increased from the Fed's bond purchase? Chapter 12 - The Federal Reserve and Monetary Policy 2. Suppose the Fed conducts an expansionary monetary policy. (Assume an economy with low inflation and a stable banking system). Illustrate graphically the effects of this expansionary monetary policy on: a) The market for federal funds3. Assume a simple closed economy, with an mpe equal to 0.75. The government has passed a balanced budget amendment. The economy goes into a recession, so the government increases government spending by 40 million to try to expand the economy. a. Calculate the change in output (AY) from the increase in government spending (AG). b. The balanced budget amendment requires the government to also raise taxes by 40 million. Calculate the change in output (A Y) from the tax hike. c. What is the net effect on output from these two policies? Was there any expansionary effect? d. Why is a balanced budget amendment problematic or undesirable? 4. Use the Figure below to answer the following questions: Federal Surplus or Deficit (as Percent of GDP), 1975 - 2017 4.0 Carter Reagan BushSr. Clinton Bush Jr. Obama 20 0.0 Percent of GDP -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 a. It is sometimes said that Republicans are the party of "small government." whereas Democrats are the "big spenders" and the party of "big government." Is this confirmed by the historical evidence of the 1975-2017 period? Chapter 10 -Fiscal Policy 6 b. What changes in discretionary Government outlays (G, TR) and Tax revenues (7) might explain the emergence of the huge deficits under Reagan, G. Bush Sr., and G.W. Bush Jr? And what might explain the surpluses under Clinton? C. Are changes in discretionary fiscal policy sufficient in explaining the emergence of deficits and surpluses? What role do automatic stabilizers play? Consider in your answer the figure of the U.S. real GDP growth rate, below.1. Which of the following is not one of the policy tools to regulate trade in goods and services? Import quotas . Tariffs c. Licensing requirements on imports d. Capital controls e. Trade-related subsidies 2. Suppose Hereland puts a quota on imports of oranges from Thereland. Which of the following groups is most likely to reap financial benefits from the imposition of the quota? a. Hereland's orange producers b. Hereland's government c. Thereland's government d. Hereland's consumers e. None of the above 3. Which of the following characterizes the trends in trade and financial flows for the U.S. in recent years? a. The volume of trade in goods and services (as a % of GDP) has increased over time, from about 10% in 1965 to almost 30% in 2015. b. China has emerged as a major source of U.S. imports. c. The volume of financial flows has increased significantly in recent years. d. Since the early 1980s, the U.S. has been running current account deficits, mostly due to the trade deficits. e. All of the above. 4. Which of the following is not one of the top buyers of U.S. exports? a. Canada b. Mexico c. China d. Japan e. France 5. Which of the following is not one of the top sellers of imports to the United States? a. Canada b. Mexico c. Brazil d. China e. Japan Chapter 14 - The Global Economy and Policy 6 6. The circular flow model in this chapter frames aggregate expenditure as: a. AE = Consumption + Intended Investment + Taxes + Exports b. AE = Consumption + Actual Investment + Government Spending + Exports - Imports C. AE = Consumption + Actual Investment + Government Spending - Taxes + Exports d. AE = Consumption + Intended Investment + Government Spending + Net Exports e. None of these accurately describes aggregate expenditure. 7. Which of the following best describes trends in trade expressed as a percentage of production from 1960 - 2015? a. both the worldwide volume of trade grew and the U.S. volume of trade grew b. the worldwide volume of trade grew while the U.S. volume of trade fell . the U.S. volume of trade grew while the worldwide volume of trade fell d. both the worldwide volume of trade fell and the U.S. volume of trade fell e. None of the above. 8. Suppose that the exchange rate between U.S. dollars and currency in France, the euro, is 1.25 dollars per euro. If purchasing parity holds, how much would we expect a bottle of perfume that costs 6100 in France to sell for in the United States? a. 80 dollars b. 100 dollars c. 120 dollars d. 125 dollars 150 dollars1. The process of pooling various kinds of loans, slicing and sorting them according to their risk levels, and repackaging them into financial instruments is known as 2. Mortgages given to people with poor credit are known as 3. The availability of government bailouts for large firms can encourage excessive risk- taking, a phenomenon known as 4. The major financial reform passed in the wake of the 2007-9 crisis was the bill. 5. The law formerly separating commercial and investment banking, which was repealed in 1999, was known as the 6. The process of increasing size and importance of the financial markets in the operation of the economy is known as 7. The theory that unregulated markets will always produce instability and crisis is referred to as the 8. In Minsky's theory, the three financial profiles that account for the different margins of safety are , and 9. The gap between the growth of labor productivity and the growth of wages, referred to as has been since the 1970s. 10. The theory that relative wage gains will be greatest for those workers who possess the education and skills to use modern technologies is 11. Since the 1980s, the difference in effective tax rates paid by the rich and the poor has with the decline in corporate taxes and an increase in payroll taxes. 12. A tax on financial transactions is often referred to as after the economist who first proposed it. Chapter 15 - Financial Instability and Economic Inequality 2 True or False 13. High mortgage rates contributed to the development of the housing bubble. 14. Since the 1970s, a greater proportion of money in the financial system has been directed towards funding productive investment, while investment in financial instruments have declined. 15. The 2008 crisis was referred to as the "Minsky's moment" because Minsky's theory of financial instability predicted such a crisis. 16. The Great Recession was less severe than the Great Depression because of the deregulation of the financial system since the 1980s. 17. The expansionary monetary policies implemented by the Federal Reserve since the 1980s have contributed to the rising income inequality in the U.S.. 18. The Dodd-Frank bill promoted deregulation of banks