One.

The standard Federal Reserve (Fed) monetary tools identified in the textbook still are in place, but are currently less effective than they were in the past. This is mostly due to the unprecedented actions the Federal Reserve took after the financial crisis to avoid a Great Depression-like financial meltdown. The result was the Great Recession, although without Fed intervention many economists believe the result could have been far worse. Intervention after the financial crisis was required because the Fed is congressionally mandated through the Federal Reserve Act of 1978 and later amendments to undertake policies directed at maintaining full employment, while keeping the inflation rate under 3% in an environment of stable real economic growth, preferably at an annual rate of over 3%. It is a tough directive that was much easier for the Fed to fulfill when they were able to couple their federal funds rate adjustments with fiscal supply-side policies coming from an environment of high unemployment, slow real economic growth and excessive inflation during the 1970s. In our current environment of low unemployment, low inflation and once again slow real economic growth, it is much more difficult for the Fed to simultaneously prevent an increase in inflation and cool the labor market without risking pushing the real economy back into recession and bringing on price deflation. To many economists, business leaders, laborers and consumers, it is unclear that the Fed should even be undergoing a policy of raising the federal funds rate at this time. None-the-less, the current view of the Board of Governors is that this and all other rates should now be increased. The problem facing the Fed, however, is that the current environment has essentially sterilized the effectiveness of traditional open market operations for targeting the federal funds rate. In the past, when labor market conditions tightened and upward pressure was being made on prices, the FOMC simply engaged in systematic increases in the federal funds rate through strategic open market purchases of Treasury securities (short term Treasury Bills, primarily) to accomplish the twin goal of lowering inflation and labor employment, albeit sometimes with negative fallout with regards to the rate of real economic growth. Before discussing the questions below, please read Monetary Policy 101, an article you will find in the Lecture Notes. Now that you have read the article, what do you think? What is different now? Will raising interest rates today result in the real economy falling back into a recession, thus adversely affecting the labor market and possibly bringing on deflation? ...or, from what you have read and learned in this course so far, should we expect the Fed policy as laid out in the article to result in a firm full employment labor market, with the real economy continuing to edge ahead at a small positive rate of increase in a calm environment of low inflation? ...or do you feel something else will happen? Why? If the Fed doesn't act and leaves rates where they are, what would you expect to happen on all three fronts (i.e., with labor unemployment, inflation and real economic growth)? Instead of raising the federal funds rate, maybe the Fed should follow the lead of the Bank of Japan and bring on negative real interest rates? Do you think we need to have negative real interest rates? Why? Finally, do you trust the Fed and our politicians to do nything right? What are they doing right? What are they doing wrong? What is your candid view of the future of the US economy?

Two.

1. An inverted yield curve is a(n) ______________ yield curve.

a. Flat, or zero slope

b. Upward sloping

c. Downward sloping

d. Downward, then upward-sloping

e. None of the above

2. Empirical evidence of the term structure of interest rates shows that,

a. The yield on long-term bonds is usually lower than the yield on short-term bonds

b. The yield on long-term bonds is usually higher than the yield on short-term bonds

c. Government bonds have a lower rate of return than corporate bonds because the

latter are riskier

d. On average interest rates on corporate investment certificates (CIC) are higher than

the interest rate offered on US Treasury debt

3. The expectations hypothesis states that,

a. Future interest rates can be forecasted by looking at the term structure of interest

rates because the return on a long-term bond is essentially the average return on

short-term bonds over the same period

b. Future interest rates can be forecasted by looking at the term structure of interest

rates because the return on a short-term bond is essentially the average return on

long-term bonds over the same period

c. Future interest rates can be forecasted by looking at past returns on similar

instruments

d. Future interest rates can be forecasted by looking at the behavior of the stock market

e. None of the above

4. According to the expectations hypothesis, what would be the annual yield of a three-year government bond if the annual yield of a one-year government bond today is 8% and the expected yield on a one-year bond one year from now is 8.5%, and the expected yield on a one-year bond two years from now is 9%.

a. 8%

b. 8.2%

c. 8.5%

d. 9%

e. None of the above

5. Plots of the yield curve can be useful for:

a. Predicting the future course of inflation

b. Predicting the future trends in international trade

c. Predicting the future course of interest rates

d. Prediction the future policy actions of the Federal Reserve System

6. An upward sloping yield curve means that,

a. Short-term interest rates are expected to fall, so that long-term interest rates will be

higher than short-term interest

b. Short-term interest rates are expected to rise, so that short-term interest rates will be

higher than long-term interest

c. Short-term interest rates are expected to rise, so that long-term interest rates will be

higher than short-term interest

d. Short-term interest rates are expected to fall, so that short-term interest rates will be

lower than long-term interest

7. Which of the following is NOT a stylized fact about the yield curve.

a. The yield curve is generally upward sloping

b. The yield curve is generally downward sloping

c. The yield curve tends to shift over time

d. The yield curve tends tend to predict future economic activity

8. If the Expectations Hypothesis holds true about long-term and short-term bonds being substitutes, then if the U.S. government decides to issue a large stock of long-term bonds, we could expect,

a. The yield curve to become steeper

b. The yield curve to become flatter

c. The yield curve to shift down

d. The yield curve to shift up

9. Suppose that businesses believe that the economy is about to expand, then we could expect,

a. The yield curve to become steeper

b. The yield curve to become flatter

c. The yield curve to shift down

d. The yield curve to shift up

10. Empirical evidence in US shows that when the spread between long term bonds and short-term bonds is negative (that is: the yield curve slopes downward or is inverted) then __________ is highly possible.

a. Higher inflation

b. Lower inflation

c. A recession

d. An economic expansion

11. According to the pure expectations theory of term structure, a flat yield curve is interpreted to mean that,

a. Interest rates are expected to rise

b. Interest rates are expected to fall

c. Interest rates are expected to remain constant

d. Interest rates are expected to rise and then to fall

e. None of the above

12. Yield curves can be classified as:

a. Upward sloping

b. Downward sloping

c. Flat

d. All of the above

e. Only (a) and (b)

13. Yield curves can be:

a. Steeply upward sloping

b. Moderately upward sloping

c. Downward sloping

d. All of the above

e. Only (a) and (b)

14. Typically, yield curves are:

a. Gently upward sloping

b. Gently downward sloping

c. Flat

d. Bowl shaped

e. Mound shaped

15. When yield curves are steeply upward sloping,

a. Long-term interest rates are above short-term interest rates

b. Short-term interest rates are above long-term interest rates

c. Short-term interest rates are about the same as long-term interest rates

d. Medium-term interest rates are above both short-term and long-term interest rates

e. Medium-term interest rates are below both short-term and long-term interest rates

16. An inverted yield curve:

a. Slopes up

b. Is flat

c. Slopes down

d. Has a U shape

e. Has an inverted U shape

17. According to the expectations theory of the term structure,

a. The interest rate on long-term bonds will equal an average of short-term interest rates

that people expect to occur over the life of the long-term bonds

b. Buyers of bonds do not prefer bonds of one maturity over another

c. Interest rates on bonds of different maturities move together over time

d. All of the above

e. Only (a) and (b)

18. According to the expectations theory of the term structure,

a. The interest rate on long-term bonds will equal an average of short-term interest rates

that people expect to occur over the life of the long-term bonds

b. Interest rates on bonds of different maturities move together over time

c. Buyers of bonds prefer short-term to long-term bonds

d. All of the above

e. Only (a) and (b)

19. According to the expectations theory of the term structure,

a. When the yield curve is steeply upward sloping, short-term interest rates are expected

to rise in the future

b. When the yield curve is downward sloping, short-term interest rates are expected to

decline in the future

c. Buyers of bonds do not prefer bonds of one maturity over another

d. All of the above

e. Only (a) and (b)

20. According to the expectations theory of the term structure,

a. When the yield curve is steeply upward sloping, short-term interest rates are expected

to rise in the future

b. When the yield curve is downward sloping, short-term interest rates are expected to

decline in the future

c. Investors have strong preferences for short-term relative to long-term bonds,

explaining why yield curves typically slope upward

d. All of the above

e. Only (a) and (b)

21. According to the expectations theory of the term structure,

a. When the yield curve is steeply upward sloping, short-term interest rates are expected

to rise in the future

b. When the yield curve is downward sloping, short-term interest rates are expected to

decline in the future

c. Yield curves should be as equally likely to slope downward as slope upward

d. All of the above

e. Only (a) and (b)

22. According to the expectations theory of the term structure,

a. The interest rate on long-term bonds will equal an average of short-term interest rates

that people expect to occur over the life of the long-term bonds

b. Buyers of bonds do not prefer bonds of one maturity over another

c. Yield curves should be as equally likely to slope downward as slope upward

d. All of the above

e. Only (a) and (b)

23. According to the expectations theory of the term structure,

a. The interest rate on long-term bonds will equal an average of short-term interest rates

that people expect to occur over the life of the long-term bonds

b. Buyers of bonds do prefer short-term to long-term bonds

c. Interest rates on bonds of different maturities do not move together over time

d. All of the above

24. Assume that over the next two years, the expected path of 1-year interest rates is 4 percent and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 2-year bond is: a. 1% b. 1.5% c. 2% d. 2.5% e. 4%

25. Assume that over the next two years, the expected path of 1-year interest rates is 1 percent and 4 percent. The expectations theory of the term structure predicts that the current interest rate on 2-year bond is: a. 1% b. 1.5% c. 2% d. 2.5% e. 4%

26. Assume that the current 1-year interest rate is 3 percent and the current 2-year interest rate is 2 percent. The expectations theory of the term structure predicts that the interest rate expected on 1-year bonds next year is: a. 1% b. 1.5% c. 2% d. 2.5% e. 4%

Three.

Answer the questions below according to the instructions given.

OPPORTUNITY COST WORKSHEET 2 Below, you are provided Gerardo's Production Possibilities Frontier between biology homework and economics homework before and after he attends economics tutoring sessions. You will use this information to identify how a technological innovation that affects production of only one good alters the opportunity cost associated with producing both goods. PPF1 depicts Gerardo's PPF between biology homework and economics homework before he attends economics tutoring sessions. PPF2 depicts Gerardo's PPF between biology homework and economics homework after he attends economics tutoring sessions. 14 Economic Homework (in pages] 10 12 14 Minlazy Homework [in pages) Part 1: Before Gerardo attends economics tutoring sessions, what is his opportunity cost of producing an additional page of economics homework? Part 2: Before Gerardo attends economics tutoring sessions, what is his opportunity cost of producing an additional page of biology homework? * Part 3: After Gerardo attends economics tutoring sessions, what is his opportunity cost of producing an additional page of economics homework?If the demand for its good or service is inelastic, a monopoly's a total revenue increases when the firm lowers its price. Ob. total revenue is unchanged when the firm lowers its price. Oc. marginal revenue is negative. Od. marginal revenue is equal to zero. Oe. marginal revenue is positive. QUESTION 6 Refer to the figure below. Assume this firm is a single-price monopoly. What is the profit-maximizing price to charge for the unit? Price 8.00 5.00 MC 3.00 D 0 300 450 600 1100 Quantity MR Oa. $0 Ob, $3,00 Oc. $5.00 d. $8,00