Question

The Federal Reserve announced Monday an unlimited expansion of bond purchasing programs to backstop the U.S. economy, as millions of American households and businesses are getting crushed by the near total shutdown of daily life to fight the coronavirus. The Fed is taking swift action never done before in its history to ensure businesses, individuals and local governments can get loans to tide them over until the economy bounces back. As part of these efforts, the Fed said Monday it would purchase Treasury bonds and mortgage-backed securities in the amounts needed to support smooth market functioning." effectively putting no limits on how many assets the Fed is willing to buy. This extraordinary move goes even further than the 2008-09 financial crisis playbook. "It has become clear that our economy will face severe disruption." Fed leaders wrote in a statement. "The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time." Economists have dubbed this the "do whatever it takes" moment for the Fed. Some analysts on Twitter compared it to when talk show host Oprah Winfrey gave everyone in the audience a car. The Fed is trying to prevent the recession from turning into a depression. James Bullard, president of the St. Louis Fed, warned that unemployment could hit 30 percent in the second quarter, a higher level than during the Great Depression. The Fed also announced Monday it will buy certain corporate bonds for the first time in its history and said it will "soon" announce a Main Street Business Lending Program. These programs are meant to provide ample availability of loans to small and large businesses on top of any moves by Congress. "The corporate bond market almost broke on Thursday and Friday. This Fed move was absolutely needed," said Aaron Brachman, a managing director at Washington Wealth Group. The coronavirus is affecting nearly every sector of the economy, spreading the pain even wider than during the 2008- 09 financial crisis. With so many businesses needing help at once, banks and credit markets are struggling to provide enough short-term loans. The Fed is trying to unclog credit markets. On Monday, Morgan Stanley became the latest big bank warning that growth in the second quarter could be down 30 percent, a record-breaking slide. "Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate," the Fed said Last week, the central bank slashed interest rates to zero and gave banks access to loans at a record-low 0.25 percent rate. The Fed also said it would do at least $700 billion in new bond purchases, but it is now indicating a willingness to do a lot more than that. This week alone, the Fed plans to purchase $375 billion worth of Treasury securities ($75 billion a day) and $250 billion worth of mortgage-backed securities ($50 billion a day). "The Great Depression was about the Fed moving too slowly. We are seeing many things today, but a slow moving Fed has not really been one of them. That's encouraging," wrote Neil Dutta, head of economics at Renaissance Macro Research in a note to clients.

QUESTION 10

1. Consider the monthly data, including the estimates for March 2020, and the information in the articles. Which of the following is the best analysis of and prediction for the money market in the U.S. economy for the next few months?  

   	a.	Shortages are causing panic buying by households, which has increased money demand. Lenders are increasing their lending to keep up with the needs of households and businesses. Money demand is increasing more than money supply.
   	b.	Shortages are causing panic buying by households, which has increased money demand . Lenders are increasing their lending to keep up with the needs of households and businesses. Money supply is increasing more than money demand.
   	c.	Falling incomes and restrictions on shopping have decreased money demand. But people and businesses are withdrawing money from bank accounts, and lenders are uncertain or pessimistic about the risks of lending. Money demand is decreasing more than money supply.
   	d.	Falling incomes and restrictions on shopping have decreased money demand. But people and businesses are withdrawing money from bank accounts, and lenders are uncertain or pessimistic about the risks of lending. Money supply is decreasing more than money demand.

3 points   

QUESTION 11

1. Which of the following is the best analysis of and prediction for inflation during the second quarter, April, May and June?

   	a.	If input shortages and firm closings are the dominant factor, inflation is likely to rise. If falling wages and restrictions on shopping are dominant, inflation is likely to fall.
   	b.	If input shortages and firm closings are the dominant factor, inflation is likely to fall. If falling wages and restrictions on shopping are dominant, inflation is likely to rise.

2 points   

QUESTION 12

1. Consider the articles and the estimated data for March. What data should we expect for the second quarter, April, May and June?

   	a.	A large negative real GDP growth rate, a much higher unemployment rate, a higher interest rate spread, a more negative Federal budget balance, and a near zero federal funds rate.
   	b.	A large negative real GDP growth rate, a much higher unemployment rate, a higher interest rate spread, a less negative Federal budget balance, and a federal funds rate rising towards 1%.
   	c.	A small positive real GDP growth rate, a near constant unemployment rate, a lower interest rate spread, a more negative Federal budget balance, and a near zero federal funds rate.
   	d.	A small positive real GDP growth rate, a near constant unemployment rate, a lower interest rate spread, a less negative Federal budget balance, and a federal funds rate rising towards 1%.

3 points   

QUESTION 13

1. Read the Washington Post article from March 23, about the Fed's policy actions. Which of the following is the best analysis of the Fed's policies?

   	a.	The Fed is buying many kinds of bonds. This will increase the money supply, reduce interest rates, and increase borrowing by businesses.
   	b.	The Fed is buying many kinds of bonds. This will decrease the money supply, reduce interest rates, and increase borrowing by businesses.
   	c.	The Fed is buying many kinds of bonds. This will decrease the money supply, raise interest rates, and increase lending by banks.
   	d.	The Fed is buying many kinds of bonds. This will increase the money supply, raise interest rates, and increase lending by banks.

2 points   

QUESTION 14

1. Consider the articles and the estimated data for March. The Federal Reserve's monetary policy in March (and going forward) is

   	a.	Expansionary and pro-cyclical.
   	b.	Expansionary and counter-cyclical.
   	c.	Contractionary and and pro-cyclical.
   	d.	Contractionary and counter-cyclical.

2 points   

QUESTION 15

1. Which of the following best uses the consumption function to analyze the effects of the Coronavirus on households?

   	a.	Closing businesses reduces employment and wages, so autonomous consumption declines. Social isolation prevents shopping, so income declines. Stock values fall to reduce wealth, so the marginal propensity to consume declines. Overall consumption spending declines.
   	b.	Closing businesses reduces employment and wages, so income declines. Social isolation prevents shopping, so autonomous consumption declines . Stock values fall to reduce wealth, so the marginal propensity to consume declines. Overall consumption spending declines.
   	c.	Closing businesses reduces employment and wages, so income declines. Social isolation prevents shopping, so the marginal propensity to consume declines. Stock values fall to reduce wealth, so autonomous consumption declines. Overall consumption spending declines.
   	d.	Closing businesses reduces employment and wages, so the marginal propensity to consume declines. Social isolation prevents shopping, so autonomous consumption declines. Stock values fall to reduce wealth, so incomes decline. Overall consumption spending declines.

2 points   

QUESTION 16

1. Consider the consumption function, and the article about potential Federal fiscal policy. The proposed policy includes a payment of $1,200 per adult and $500 per child. These would be checks sent to taxpayers and other U.S. residents. Which of the following is the best analysis of this policy, using the consumption function?

   	a.	This policy would be an increase in autonomous consumption (A), intended to increase consumption spending.
   	b.	This policy would be an increase in the marginal propensity to consume (b), intended to increase consumption spending.
   	c.	This policy would be an increase in taxes payments (T), intended to decrease consumption spending.
   	d.	This policy would be an increase in transfer payments (R), intended to increase consumption spending.

2 points   

QUESTION 17

1. Consider the articles and the estimated data for March. The fiscal policies being debated by Congress are

   	a.	Expansionary and pro-cyclical.
   	b.	Expansionary and counter-cyclical.
   	c.	Contractionary and and pro-cyclical.
   	d.	Contractionary and counter-cyclical.

Answer 1

Answer 10 c.)

In the next few months from march 2020, incomes falling and restrictions on consumer spending due to coronavirus scare have decreased money demand. People and businesses are withdrawing money from bank accounts and lenders are uncertain or pessimistic about the risks of lending as their investment is blocked in inventories which are not moving.However as FED has taken steps to ensure money supply is adequate to meet panic buying in short term and falling demand in few months, Money demand will be decreasing more than money supply. This can be seen from federal funds rate which has decreased in last months.Also real GDP has declined.

Answer 11 a.)

If there are shortages in inputs , it will cause input prices to rise.Further if some firms close down due to adverse market conditions, lesser supply of output is available than demand.Both these will result in inflationary conditions if they are dominant factors.

However if incomes fall due to firms or businesses closing down, or due to more spending towards healthcare with same income it will result in aggregate demand decreasing. Also restrictions in shopping will pile up inventories again causing prices to fall to clear market.If such factors are dominant then inflation will most likely fall down.

Answer 12 a.)

In the next quarter, proposed fiscal policy has 10-12 weeks of stimulus package causing a large negative Federal budget balance This could be to contain a large negative real GDP growth rate resulting in higher unemployment rate.Further it would reduce lending by thus a higher interest rate spread. To keep up the lending there could be a near zero federal funds rate.

Answer 13 a.)

As per news article, FED is buying many differnent kinds of bonds.This will inject money into the system,thereby raising money supply,reducing interest ratesas more money is available for lending and restore lending and borrowing by the businesses which have been hit by the pandemic.

Answer 14 b.)

The Federal funds rate have decreased to accomodate the shock. Reduction in FED funds rate results in increasing money supply and is therefore expansionary in nature.

Further it is counter cyclical. if we look at data for 2015-19, for first three years (2015,2016,2017) FED funds rate has been < equal to 1%. Further in next 3 years(2018,2019,2020) it was estimated to be greater than 1 %. However due to the shock the rates have come down to less than 1%( look at March 2020 figure). So these rates are not following the pattern or are counter cyclical.

Answer 15 b.)

Declining consumption due to COVID can be analysed as -

• Closing businesses reduces employment and wages, so income declines.
• Social isolation prevents shopping, so autonomous consumption declines .
• Stock values fall to reduce wealth, so the marginal propensity to consume declines.

Therefore overall consumption spending declines.

Answer 16 d.)

Here increase in government spending in proposed policy is made through direct benefits transfer. This would result in increase in transfer payments and is aimed to restore consumption spending which has otherwise declined.

Answer 17 a.)

Government budget has seen an upward trend towards spending since 2015. Higher spending means expansionary fiscal policy. Also it is pro cyclical in nature.It is following the previous pattern of higher govt. expenditure year on year basis.