Monetary Policy & More

CFA Level I
#1
  1. Which of the following statements concerning monetary policy is least accurate? A) The new Keynesian feedback rule is concerned only with business cycle stability. B) Monetary policy changes that are both announced and credible are more likely to be successful than those that are either unannounced or lacking credibility in the markets. C) The new monetarist feedback rule places emphasis primarily on price level stability. D) The primary objective of the Federal Reserve is price level stability. 2. The new monetarist (or McCallum) feedback rule: A) suggests that money supply growth is triggered by changes in aggregate demand. B) adjusts rather slowly to changes in economic growth rates. C) is based on the expected velocity of money and the expected growth rate of real GDP. D) sets the money supply growth rate equal to the target inflation rate plus real GDP growth plus velocity. 3. The federal government seeks ways to increase the total investment component of GDP. In response to the government’s objective, economist Sean Zadora recommends that the federal government lower taxes on interest earned on savings accounts. Zadora’s colleague, Timothy Smythe, recommends that the federal government reduce its budget deficit. Regarding the statements made by Zadora and Smythe: Zadora Smythe A) Correct Incorrect B) Incorrect Incorrect C) Incorrect Correct D) Correct Correct
#2
  1. D 3) A
#3

I think its: 1. (A) 2. (B) 3. (A)

#4

Yup, smartrisk is right.

#5
  1. A 2. B 3. D Income tax reductions on interest income cause savings and investments to increase. Lower taxes on savings make saving more attractive. Therefore, Zadora is correct. Smythe is also correct. Budget deficits (expenditures exceed tax revenues) equate to negative savings by the government, detracting from total investment. A reduction in the government deficit, as recommended by Smythe, indicates that the government’s negative savings is lessening, thereby contributing positively to total investment. Also, as the government reduces its deficit, it will likely lead to lower interest rates and to a smaller “crowding out effect” of private investment.
#6

If govt spending decreases, then budget deficit decreases … Decreasing govt spending would lead to lower the “I” in gdp…

#7

cavil Wrote: ------------------------------------------------------- > 1. A > 2. B > > 3. D > > Income tax reductions on interest income cause > savings and investments to increase. Lower taxes > on savings make saving more attractive. Therefore, > Zadora is correct. Smythe is also correct. Budget > deficits (expenditures exceed tax revenues) equate > to negative savings by the government, detracting > from total investment. A reduction in the > government deficit, as recommended by Smythe, > indicates that the government’s negative savings > is lessening, thereby contributing positively to > total investment. Also, as the government reduces > its deficit, it will likely lead to lower interest > rates and to a smaller “crowding out effect” of > private investment. Cavil, are these the final answers?

#8

cavil Wrote: ------------------------------------------------------- >> > 2. The new monetarist (or McCallum) feedback > rule: > > A) suggests that money supply growth is triggered > by changes in aggregate demand. > > B) adjusts rather slowly to changes in economic > growth rates. > > C) is based on the expected velocity of money and > the expected growth rate of real GDP. > > D) sets the money supply growth rate equal to the > target inflation rate plus real GDP growth plus > velocity. > Isn’t B correct? It is based on those as well as the target inflation rate, right?

#9

Smartrisk, they are final answers according to Schweser.

#10

am i wrong here or does it seem like increased government spending pulls GDP in two opposite directions? it increases the “G” component of GDP, but at the same time reduces the “I” component by decreasing the total savings as a result of the increased spending. is that correct? if this is correct, do we know of a “net effect”? would there ever be a question like “the goverment increases its spending by one million dollars. how should this move affect OVERALL GDP?”, and if there was a question like this, is it answer-able? edit: ok apparently the “I” component is just from businesses and households, and not from government. if that is correct, why is smythe correct? why would decreased government spending affect the “I” component?