ECON 2105 Module 9 Questions

Which of the following are also names for the interest rate?

- The price of money - The nominal interest rate

Banks can expand reserves, and make more loans by:

- attracting deposits and encouraging saving - borrowing from the Federal Reserve

In the real world, the actual money multiplier tends to be smaller than 1/rr because:

- banks do not loan out all of their excess reserves - people hold some loaned money as cash

Monetary Policy affects interest rates which in turn, affect:

- economic growth - employment - inflation - investment

If the Federal Reserve decreases the discount rate there will be ____________ borrowing from the Federal Reserve and banks will _______________ lending. This will ____________ the money supply and ______________ interest rates.

- more - increase - increase - decrease

The money multiplier will equal 1/rr so long as:

- people can't hold any loaned money as cash - banks loan out all of their excess reserves

Which of the following will cause consumption to fall?

- repayments of loans - deteriorating expectations - falling wealth

Suppose the reserve requirement for the United States is 10%. For each of the following scenarios determine whether the Federal Reserve should undertake open market operations to purchase or sell Treasury bonds to accomplish its goal; provide a brief explanation of your analysis. Also, determine the size of the purchase or sale of bonds necessary to accomplish the objective. The Federal Reserve is concerned about the sluggish economic activity in the country. It believes an increase in the money supply of $100 billion will be adequate to allay any fears of recession. 1. The FOMC (Federal Open Market Committee) should _________ bonds. 2. With a reserve requirement of 10%, the money multiplier is ____________. 3. If the money supply needs to increase by $100 billion, the Fed must __________ in bonds.

1. buy 2. 10 3. buy $10 billion

Suppose the reserve requirement for the United States is 10%. For each of the following scenarios determine whether the Federal Reserve should undertake open market operations to purchase or sell Treasury bonds to accomplish its goal; provide a brief explanation of your analysis. Also, determine the size of the purchase or sale of bonds necessary to accomplish the objective. The Federal Reserve is concerned about accelerating inflation and wants the money supply to decrease by $20 billion. 1. The FOMC (Federal Open Market Committee) should _____________ bonds. 2. With a reserve requirement of 10%, the money multiplier is ________________. 3. If the money supply needs to decrease by $20 billion, the Fed must _____________ in bonds.

1. sell 2. 10 3. sell $2 billion

The money multiplier equals:

1/reserve requirement (1 divided by the RR)

What happens when the money supply is decreased?

Aggregate demand decreases and Real GDP decreases

_____________ reserves held as currency earn no interest.

Excess

______________ reserves, the amount the bank can lend out to earn interest, equal _______________ reserves minus _____________ reserves.

Excess, total, required

The Federal Reserve Bank is also called the _________.

Fed

What happens to interest rates and investment when the Federal Reserve increases the money supply?

Interest rates decrease and investment increases

What does the supply of federal funds look like?

It is a horizontal line

__________________ reserves are equal to deposits times the reserve requirement.

Required

__________________ reserves are the fraction, or portion, of checkable deposits that a bank must keep on hand.

Required

Which of the following would cause the Fed to implement contractionary monetary policy?

The AD (aggregate demand) curve shifts to the right

Which three values are related, so that one changes, so does the others?

The dollar value of reserves held by banks, the reserve requirement, and the money supply

Investment demand can be described as

The negative relationship between the quantity of. new physical capital demanded by firms and the prevailing interest rate

A money market is...

a market in which the demand for and supply of money determine an interest rate, or opportunity cost of holding money balances

When economists talk about "interest rates" or even "the interest rate" they mean:

all interest rates since interest rates all tend to move in the same direction

The federal funds rate is determined by the supply and demand for ___________ reserves.

borrowed

The federal funds rate is determined by the supply and demand for _______________ reserves.

borrowed

Expansionary monetary policy:

causes interest rates to fall and shifts the aggregate demand (curve) to the right

"Tight money" describes _____________ monetary policy.

contractionary

When aggregate demand rises too much, to decrease aggregate demand we can use ______________ monetary policy

contractionary

The actions taken by a country's central bank to contract the money supply and raise interest rates is called:

contractionary monetary policy

Suppose the economy is "overheating" because of a high inflation rate. Indicate the changes that the economy would go through, if the Federal Reserve decides to take action. The Federal Reserve would need to _______________ the money ___________.

decrease, supply

Suppose the economy is "overheating" because of a high inflation rate. Indicate the changes that the economy would go through, if the Federal Reserve decides to take action. This in turn causes aggregate ___________ to ________________.

demand, decrease and shift left

The __________ rate is the interest rate at which banks can borrow money directly from the Federal Reserve

discount

Excess reserves formula:

excess reserves = total reserves - required reserves

The actions taken by a country's central bank to expand the money supply and lower interest rates is called:

expansionary monetary policy

Suppose the economy is "overheating" because of a high inflation rate. Indicate the changes that the economy would go through, if the Federal Reserve decides to take action. As a result, the price level would ____________ but this could cause unemployment to ____________.

fall, increase

A decrease in aggregate demand will cause the price level to _____________ and unemployment to ___________ in the short run.

fall, rise

A formal market for overnight loans of federal reserves is the:

federal funds market

The interest rate that helps determine the interest rates charged on other loans is called the:

federal funds rate

For decades the reserve requirement has rarely been used as a tool of monetary policy because:

frequently changing the reserve requirement would be very disruptive to the banking sector and credit markets

The money multiplier is the amount by which a $1 change:

in reserves will change the money supply

Suppose the economy is "overheating" because of a high inflation rate. Indicate the changes that the economy would go through, if the Federal Reserve decides to take action. This action would ____________ interest rates, which ____________ investment.

increase, decreases

When the Fed _______________ the federal funds rate target, the money supply decreases and interest rates rise.

increases

Banks allow households who are spending less than their total income to keep their unused income in a safe place while also earning ____________.

interest

The demand and supply for money interact to determine the ____________ rate.

interest

Changing the money supply can affect:

interest rates, thereby changing investment spending

Governments use _____________ policy to keep prices stable and encourage economic growth.

monetary

The ___________ market is a market in which the demand for and supply of money determine an interest rate, or opportunity cost of holding money balances.

money

The fraction of checkable deposits that banks must keep on hand as reserves, either as currency or on deposit with the Federal Reserve is called the:

reserve requirement

If consumers increase the amount of spending, aggregate demand shifts to the _________.

right

A "bank __________" occurs when depositors rush, in mass, to withdraw their funds from a bank.

run

When the Fed ____________ bonds, it takes money out of the economy and reduces reserves, which contracts the money supply, causing interest rates to ____________.

sells, rise

By changing the money _____________, the Federal Reserve can influence real GDP.

supply

The money multiplier equals:

the overall change in the money supply/the initial change in reserves