Which of the following is a likely effect when the discount window is closed quizlet?

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Currency is probably more liquid, since there may be a penalty for pulling money out of a savings account.

A peanut butter and jelly sandwich is surely easier to exchange for a bologna sandwich. Even kids who don't like peanut butter and jelly will take a peanut butter and jelly sandwich to exchange for whatever they do want. Sushi is probably hard to "spend," unless, of course, you are an elementary school student in Japan or Korea.

To buy a home, it's best to write a check. No realtor or escrow office wants someone walking in with a suitcase full of cash.

In a postapocalyptic wasteland, rice spends much more readily than currency.

In the Middle Ages, gold would spend much more easily than works of art. Art can be faked, and few can accurately judge what a work is worth.

If you are buying an entire corporation, you can pay for it with Treasury bonds. You can't buy it with currency, but you can buy it with a stack of $10,000 Treasury bonds. This is a reminder that what counts as "liquid wealth" depends on the situation.

We mentioned how difficult it can be for the Federal Reserve to actually control aggregate demand: Its control over the broader money supply (M1 and M2) is weak and indirect, plus it can't control velocity very much at all. Let's translate the following bullet points from the chapter into an expanded aggregate demand equation. You know that increasing AD means increasing spending growth, M ⃗ + (v ) ⃗ , but now you know that M (growth in M1 or M2, money measures that include checking accounts) depends on growth in the monetary base (MB) and on the money multiplier (MM). That means an increase in AD requires an increase in (MB) ⃗ + (MM) ⃗ + (v ) ⃗

Let's apply this fact to the following cases mentioned in the chapter. In all cases, the Federal Reserve is trying to boost AD by raising (MB) ⃗. But if there's a fall in (MM) ⃗ or a fall in (v ) ⃗ at the same time, the Fed's actions might do nothing to AD. In each case below, what are we concerned about: a fall in (MM) ⃗ or a fall in (v ) ⃗?
a. Will banks lend out all the new reserves or will they lend out only a portion, holding the rest as excess reserves?

b. Will increases in the monetary base translate into new bank loans?

c. If businesses do borrow, will they promptly hire labor and capital, or will they just hold the money as a precaution against bad times?

In the past, the Federal Reserve didn't pay interest on reserves kept in Federal Reserve banks: For an ordinary U.S. bank, money kept at the Fed earned zero interest, just like money stored in a vault or in an ATM machine. In 2008, the Fed started paying interest on deposits kept at the Fed.

a. Once the Fed started paying interest, what would you predict would happen to demand for reserves by banks: Would they demand more reserves or fewer reserves from the Fed?

b. If a central bank starts paying interest on reserves, will private banks tend to make more loans or fewer loans, holding all else equal? (Hint: Does the opportunity cost of making a car loan rise or fall when the central bank starts paying interest on reserves?)
c. Let's put parts a and b together, keeping in mind the fact that bank loans create money. That means your answer to part b also tells you about the money supply, not just about the loan supply. If a central bank starts paying interest on reserves, will the reserve ratio chosen by banks tend to rise or fall? And will the money multiplier tend to rise or fall?

d. Your answer to part c tells us that when the central bank starts paying interest on reserves, there's going to be a shift in M1 and M2, the broad forms of money supply that include money created through loans. But there are a lot of ways to affect the money supply, so if one force is pushing the money supply in one direction, we can find another tool to push the money supply in the opposite direction. Therefore, if a central bank chooses to start paying interest on reserves, but it wants M2 to remain unchanged, what should the bank do to the supply of reserves: Should it increase the supply of reserves or decrease the supply of reserves?

We explained how a central bank has an important role in maintaining confidence: "High confidence" keeps velocity growth and the money multiplier from falling. But as we've seen, sometimes one has to be cruel to be kind.
President Franklin Roosevelt followed this "tough love" approach during the Great Depression. Soon after taking office, he closed all banks for a four-day "bank holiday." During this holiday, he gave his first Fireside Chat, a radio address where he explained his policies to the American people in plain language. After the four-day holiday, he still kept one-third of all U.S. banks closed (mostly small farmer banks with one or two branches). Over the next few years, only half of this one-third eventually reopened.
Thus, FDR's bank holiday pushed the broad U.S. money supply (M1 or M2) down. Nevertheless, the economy grew quickly during FDR's first year, 1933. Why? Because FDR promised that the banks that reopened were the safest banks, and he promised that the federal government would keep these safer banks open through generous discount window lending. This boosted confidence and encouraged people to borrow from and lend to the remaining banks.
As Milton Friedman and Anna Schwartz put it in their classic book A Monetary History of the United States: "The emergency revival of the banking system contributed to recovery by restoring confidence in the monetary and economic system and thereby inducing the public . . . to raise velocity . . . rather than by producing a growth in the stock of money" (p. 433).
Let's see how an emotional concept like "confidence" shows up mathematically. To keep things simple, we'll look at AD in terms of growth in nominal GDP (growth in dollar sales) rather than growth in real GDP (growth in actual output). We'll compare the "before" and "after," so we'll skip over 1933, the year of the biggest banking crisis and of FDR's solution to the crisis:

Year 1932 - M2 - 35.3B - v 2.16
Year 1934 - M2 - 33.1B - v 2.36

a. What was the level of nominal GDP in 1932 and 1934?
b. What was the growth of M2 between these two years?
c. What was the growth of velocity between these two years?
d. What was the growth of nominal GDP between these two years?
e. If velocity growth had been zero during this period (perhaps due to low confidence), but money growth stayed the same, what would have happened to nominal GDP growth?

By U.S. law, your employer pays half of the payroll tax and you, the worker, pay the other half. We mentioned that according to the basics of supply and demand, the part of the tax paid by the employer is likely to cut the worker's take-home pay. Let's see why. We'll start off in a land without any payroll taxes and then see how adding payroll taxes (like FICA and Medicare) affects the worker's take-home pay.

a. Who is it that "supplies labor"? Is it workers or firms? And who demands labor? Workers or firms?

b. The chart below illustrates the pretax equilibrium. Mark the equilibrium wage and quantity of labor in this market. In part c, remember that this "wage" is the amount paid directly to workers.

c. Suppose the government enacts a new payroll tax of 10% of worker wages, "paid" fully by employers. What will happen to the typical firm's demand for labor? In other words, when firms learn that every time they hire a worker, they have to pay not only that worker's wage but also pay 10% of that work¬er's wage to the government, will that increase or decrease their willingness to hire workers? After you answer in words, also illustrate the shift in the graph.

d. So, in the equilibrium with a new fully-employer-paid payroll tax, will worker's take-home wages be higher or lower than beforehand?

e. Imagine that most workers want full-time jobs to support their families whether the wage is high or low. What does this imply about the shape of the supply curve? Redo the analysis with the new supply curve and discuss the exact effect on wages of the payroll tax.

a. The 5% copayment method would probably cause people to spend more than today. If $1 of cash can buy me $20 of food, I'll probably buy a lot of food, even if I am extremely poor. For instance, a few hours of panhandling in a major city would yield enough quarters to purchase a month's worth of food. So, even the very poorest Americans would be likely to acquire enough cash to buy a sizable amount of food. Those who are slightly less poor—people earning minimum wage for 10 or 20 hours per month, for instance—would be able to purchase as much food as a person could hope to eat.

b. Under the 5% copayment method, food spending would grow faster. Under the current method, people get a fixed number of dollars per month, so every extra dollar must come out of the poor person's pocket. But under the 5% copayment method, a person needs only a nickel to purchase an extra dollar's worth of extra-delicious food. The copayment method would set off a federal spending explosion.

c. Health insurance, including Medicare and the Medicaid programs, are more like the copayment method: Americans pay small copayments or none at all, so they are "insulated" from the costs of their purchases.

d. There is rapid innovation in health care, so Americans who only have to make small copayments will likely purchase all of the best new health care. If the government instead paid a fixed dollar amount per Medicare or Medicaid recipient, the recipients would be reluctant to spend more than the fixed dol¬lar amount. This would hold growth in federal government medical spending to a lower level.

Many good answers are possible. Here is one. It's not obvious what the best way to help people (poor or otherwise) is. The fact that some people give cows, others give shoes, and others build wells suggests that well-intentioned people can't necessarily agree on the best way to help. Perhaps different people need different things. People often (not always) have a better idea of how to help themselves than others have of how to help them. Not only do recipients have better knowledge of their own preferences and constraints, but they also have a better incentive to know what really works. Have the people who give cows compared their efforts to the people who give shoes? The charitable ratings agency Givewell.org has found that almost no charitable groups study their own effectiveness using scientifically proven randomized control trials. Arguments like this have convinced some people that giving cash is likely to be more effective. If you give someone a cow when a goat would have been better, some of the giving has been wasted. Cash lets the people with the best knowledge and incentives, the poor themselves, choose what is best for them.

A counter argument to giving cash is that the recipients sometimes do not know what is best for them. Hand-washing, for example, can help to prevent diarrhea and pneumonia, two of the leading causes of death in children around the world, but even when soap and water are available not everyone washes their hands appropriately. Perhaps education can help more than cash.

It's also not always possible to give cash to the people we want to help. For example, if we give a family cash to help send their kids to school, might the money instead be spent by another family member on alcohol or entertainment? These are real problems, although randomized control trials in developing countries do suggest that, overall, cash works better than most other methods of helping the poor.

Let's see what the "three difficulties with using fiscal policy" look like in real life. Categorize each of the following three stories as either (1) crowding out, (2) magnitude, or (3) a matter of timing.

a. During a recession, the State of New York hires 1,000 new trash collectors. The state legislature in Albany takes six months to pass a law to hire the new trash collectors, and because of government rules and paperwork, the government actually hires the workers 18 months after the recession has begun.

b. During a recession, the State of New York hires 1,000 new trash collectors. Five hundred of the new trash collectors, however, were just people who quit their jobs as restaurant employees in order to take the better-paying trash collector jobs.

c. During a recession, the State of New York hires 1,000 new trash collectors. However, during the course of the recession, 300,000 additional people in New York lose their jobs.

You're flipping through the newspaper, reading about shocks that have hit the U.S. economy and reading what Congress is planning to do about the shocks. (Remember that "shocks" can be either good or bad.) Is Congress even getting the direction of its response right? And if it is getting the basic direction correct, is it fighting against a long-run aggregate supply shock, where a fiscal response may not be very effective? While these policy choices will each have effects on long-run growth and on income distribution, in this chapter you should focus only on the big picture effect on aggregate demand. In each of the following cases, state whether the action taken by Congress is likely to be in the wrong direction, the correction direction for an AD shock, or the correction direction for a long-run aggregate supply shock but expect a big change in inflation.

a. Many banks have failed, and the money supply has fallen. In response, Congress decides to raise income taxes to pay down the federal debt. (Historical note: This policy response was similar to FDR's campaign platform when he ran for president in 1932.)

b. Many banks have failed, and the money supply has fallen. In response, Congress decides to cut back on government purchases to save money.

c. A wave of investor euphoria ("irrational exuberance") about the Internet has increased spending growth. Congress raises income taxes on the richest Americans in response.

d. Oil prices double over the course of a year, from $3 per gallon to $6 per gallon. In response, Congress sends $300 checks to every American family so that people can better afford to pay for gas.

e. Oil prices double over the course of a year, from $3 per gallon to $6 per gallon. In response, Congress raises taxes on companies that refine and deliver petroleum products.

f. The Federal Reserve has followed a slow-money-growth policy, despite the wishes of Congress. In response, Congress cuts taxes and increases government purchases.

When we discussed unemployment in our Unemployment and Labor Force Participation chapter, we noted that people will search a long time to find a good job. So it might only take you two weeks to find a minimum wage job, but it might take you six months to find a job paying five times the minimum wage. Let's investigate how this simple fact might cause expansionary fiscal policy to increase the unemployment rate, at least temporarily.
In the United States, federal contracts to build roads, bridges, or buildings must pay higher-than-average wages. The law requiring this is known as the Davis-Bacon Act, or the "prevailing wage law."

a. If the unemployment rate is 6% before a rise in government purchases, and if a rise in government purchases induces the typical unemployed person to search 10% longer in the hopes of finding a high-paying government job, what will the unemployment rate be after the rise in government purchases? Only consider the impact of this waiting-for-a-good-job effect.

b. If the government wanted to get the good aggregate-demand-stimulating effects of fiscal policy, but wanted to eliminate this extra waiting-for-a-good-job unemployment, how could it change current law to do so?

We usually think about crowding out as a decrease in private consumption or investment in response to an increase in government purchases. But the idea works in reverse as well, an idea we might call "crowding in." Consider the following economy.

a. Starting from this initial position, the economy is hit by one shock: a large decrease in government purchases, perhaps caused by the end of a war. Holding the growth of C, I, and X constant for a moment, illustrate this shock, labeling the change "Fall in growth of G."

b. Now consider a possible side effect of the fall in the growth of G: the reversal of crowding out or crowding in. If there is 100% "crowding in," what happens to the AD shift you described in part a?

c. If there were 100% crowding out/in and no multiplier effect, what can we say about the effect of a change in the growth of G on aggregate demand?

d. Consider all of the laid-off government workers in this question: If there were 100% crowding out/in and no multiplier effect, where do these laid-off workers end up?