Final Exam

Using the equation of exchange, if real GDP increases by 3.0 percent, the velocity of money grows by 1.0 percent and the growth rate of money is 3.0 percent; what is the rate of inflation?

+1.0 percent

Use the following formula for the Taylor rule to determine the target federal funds rate.target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)where the current rate of inflation is 5 percent, the natural rate of interest is 2 percent, the target rate of inflation is 2 percent, and output is 3 percent above its potential, the target federal funds rate is

10 percent.

Which one of the following statements is not correct?

Any point on the short-run aggregate supply curve reflects current inflation equaling target inflation.

A customer of Bank A writes a $20,000 check for a new car, which the car dealer deposits in his bank, Bank B. How does this transaction change reserves at Bank A and Bank B?

Bank A's reserves decrease by $20,000 and Bank B's reserves increase by $20,000.

If M = quantity of money, m = money multiplier, MB = monetary base, C = currency, D = deposits, R = reserves, RR = required reserves, and ER = excess reserves, then m would equal

M/MB.

Equilibrium in the money market would be expressed by which one of the following?

Ms = Md

If M = quantity of money, m = money multiplier, MB = monetary base, C = currency, D = deposits, R = reserves, RR = required reserves, and ER = excess reserves, then RR would equal

R - ER.

The Fed sells German bonds to commercial banks. Which one of the following best describes the impact on the Fed's and the banking system's balance sheets resulting from this transaction?

The Fed's assets and liabilities decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.

If we look at the equation for money demand that summarizes Irving Fisher's quantity theory of money, which one of the following statements is true?

There isn't an explicit role for the interest rate in the equation.

Which one of the following would not shift the aggregate expenditures curve?

a change in the real interest rate

To an economist, the term "inflation" refers to

a continually rising price level.

Gold is

a small portion of the Fed's assets.

Modern monetary policymakers work to reduce the volatility created by fluctuations in __________ by adjusting __________.

aggregate demand and aggregate supply; target interest rate

Suppose the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check. When the check returns, the Fed's balance sheet will show

an increase in assets and liabilities of $1 million.

Which one of the following would cause an increase in the potential output of a country?

an increase in the capital stock

A rate of inflation that exceeds the growth rate of money for a country could be explained by

an increasing velocity of money.

In 1998 (and until 2003), the ECB explicitly assigned money a prominent role in its stability-oriented strategy by

announcing a quantitative reference value for the growth rate of a broad monetary aggregate.

Targeted asset purchases are

asset purchases that shift the composition of the Fed's balance sheet.

Reserves are

assets of commercial banks and liabilities of the central bank.

The fact that, for most of its history, the Fed was reluctant to make discount loans

at times was a destabilizing force for financial markets.

One key difference between reserve requirements for the Fed and the European Central Bank (ECB) is that the ECB's reserve requirements are

based on all of a bank's liabilities.

The debate over the causes of recessions in the United States in recent years has included arguments about

both monetary policy and higher oil prices.

Evidence points out that since the mid-1950s just about every recession was preceded by rising interest rates. This suggests that the recessions were

caused in part by the actions of the Federal Reserve.

While GDP was once a key cyclical indicator, its usefulness has declined substantially for all of the following reasons except which one?

contains too much information

As of 2019, even though the ECB charges a fee for accepting excess reserves, banks have not switched from holding reserves to holding cash in their vaults. Were they to make that switch, the policy impact of the negative deposit rate would become

contractionary.

The monetary base is the sum of

currency in the hands of the public and reserves in the banking system.

The economy is in both a short- and long-run equilibrium if

current inflation equals expected inflation and current output equals potential output.

If the economy is in long-run equilibrium, then

current inflation should equal expected inflation.

Each of the following factors contribute to the slope of the dynamic aggregate demand curve, except the

current level of technology.

The intersection of the aggregate demand curve and the short-run aggregate supply curve determines

current output and current inflation.

At any point along the long-run aggregate supply curve,

current output equals potential output and expected inflation equals current inflation.

Use the following formula for the Taylor rule target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)to determine what would happen if output in the economy were to fall by an additional one percent below potential. Then, the target federal funds rate would

decrease by 0.5 percent.

Use the following formula for the Taylor ruletarget federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)to determine what would happen if output in the economy were to fall by an additional one percent below potential. Then, the target federal funds rate would

decrease by 0.5 percent.

During economic slowdowns (recessions), the velocity of money tends to

decrease.

During the 1990s, the money multipliers for M1 and M2

decreased.

The potential output of a country would increase as a result of each of the following, except which one?

depreciation of the capital stock

During the 1990s many countries developed a monetary policy framework that focused on inflation targeting. This is an example of policymakers focusing

directly on an objective.

In the United States, loans made by Federal Reserve to banks are

discount loans.

Which one of the following would not be considered an unconventional monetary policy tool?

discount rate

If the Fed were to decrease the required reserve rate from 10 percent to 5 percent, the simple deposit expansion multiplier would

double.

The Fed can control

either the size of the monetary base or the price of its components.

If the Fed sees no need to engage in expansionary monetary policy, then

eventually, the Fed will shrink its balance sheet by letting securities it holds expire.

Between 1970 and 2000, if the Fed had tried to hit its money growth targets, the

federal funds rate would have changed often and by large amounts.

The Taylor rule allows the real long-term interest rate to

fluctuate with the natural rate of interest.

If M2 is four times larger than M1, the velocity of M1 should be

four times larger than the velocity of M2.

The monetary base is also known as

high-powered money.

Often, central banks that employ inflation targeting have a hierarchical mandate that means that

hitting the inflation target comes first, and everything else comes second.

The simple deposit expansion multiplier is really too simple for understanding the link between changes in a central bank's balance sheet and the quantity of money in the economy because it

ignores the fact people might change their currency holdings.

Empirical research has shown that

in the 1990s and 2000s, velocity was more sensitive to an increase in the opportunity cost of holding money than in the 1980s.

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's total reserves will

increase by $100,000.

A central bank's purchase of securities made by writing checks on itself will

increase the size of their balance sheet.

From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was that

interest rates rose very high.

Consider the following ratio: the average annual inflation rate/the average annual money growth rate. If a country's rate of money growth consistently exceeds the rate of inflation the ratio would be

less than one.

If reserve demand is volatile, in order for the central bank to keep interest rates from being volatile, it must

let the quantity of reserves fluctuate.

Each of the following items would appear as liabilities on the central bank's balance sheet except which one?

loans

Discount loans are

made when banks need relatively small amounts of cash for the short term

In studying the average annual inflation and money growth in 160 countries over the three decades that began in 1980, it is startling to see that researchers found many countries that had experienced rates of inflation that averaged

more than 200 percent a year.

The velocity of M2 is

more volatile in the short run than the long run.

Economic researchers have found

no examples of countries with high rates of money growth and low inflation rates.

An open market sale of U.S. Treasury securities by the Fed will cause the banking system's balance sheet to show

no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's required reserves will

not change.

The point where the central bank's target inflation rate is consistent with the long-run real interest rate lies

on the monetary policy reaction curve.

The European equivalent of the U.S. market federal funds rate is called the

overnight cash rate.

The portfolio demand for money reflects the

portion of wealth people desire to hold in the form of money.

The relationship between the velocity of money and interest rates is

positive but not stable.

The long-run aggregate supply curve intersects the horizontal axis at the

potential level of output.

For a three-year period from October 1979 to October 1982, the FOMC

primarily targeted reserves.

If government purchases increase and as a result push current output above potential output, monetary policymakers are likely to

raise the real interest rate.

In the long run, with %ΔV = 0, we can conclude that the inflation rate equals the

rate of money growth minus growth in potential output.

If the equation of exchange is MV = PY, the Y represents

real GDP.

The only solution available to a country experiencing extremely high rates of inflation is to

reduce money growth.

The monetary base is the sum of

reserves and currency in the hands of the public.

Evidence points out that since the mid-1950s just about every recession was preceded by

rising interest rates.

The Lucas critique focuses specifically on the

role that economic policymaking has on people's economic behavior.

As a portion of total assets measured in billions of dollars, the largest asset on the Fed's balance sheet is

securities.

If most people expect the inflation rate will increase, the

short-run aggregate supply curve would shift to the left.

Recent policy statements by the FOMC announce and explain its

short-term interest-rate and balance-sheet adjustments with no mention of money growth targets

Forward guidance includes

statements today about policy targets in the future.

When a business purchases a $25,000 computer system by writing a check, the business's balance sheet will

still show the same total amount of assets as before the purchase.

In the period of 1979 to 1982, if the Fed had set an interest rate target that was equal to the actual market interest rates that occurred, the

target would not have been politically acceptable.

Potential output of the country when viewed over long periods of time

tends to rise over time.

The money multiplier is much lower today than it was 25 years ago because

the currency-to-deposit ratio is much higher today.

The higher the nominal interest rate

the less money individuals will hold for any given level of transactions and the higher the velocity of money.

In dollar amounts,

the monetary base is smaller than M1, and M2 is larger than M1.

Given the equation of exchange, MV = PY, when central bankers control short-term nominal interest rates by adjusting the level of reserves in the banking system, their actions are expected to primarily affect

the rate of growth of M.

Crises that occasionally hit financial markets will increase the demand for money since

the risk of holding money relative to other financial assets decreases.

When the Fed makes a discount loan, the impact on the banking system's balance sheet is

the same as that of an open market purchase.

In the short run, the point on the aggregate demand curve where an economy will end up in equilibrium depends on

the short-run aggregate supply curve.

All other factors equal, if the costs of converting bonds and other financial securities to a means of payment increase, then

the transactions demand for money should increase.

The interest rate on excess reserves is

the upper bound of the federal funds target rate range.

Consider the following graph. If the Fed increases the IOER from IOER Rate0 to IOER Rate1, they are implementing what type of policy?

tighter monetary controls where there is an increase in the rate at which banks are willing to lend

A good monetary policy instrument is

tightly linked to monetary policy objectives.Correct

In the short run, the aggregate supply curve is

upward-sloping.

If output and inflation are unrelated in the long run, the long-run aggregate supply curve must be

vertical.

Most responsible central banks publish their balance sheet

weekly.

Given that velocity was more sensitive to an increase in the opportunity cost of holding money in the 1990s and 2000s as compared to the 1980s, using the relationship from the 1980s to make monetary policy in the 1990s

would not have produced the desired results.

Using the equation of exchange, if inflation is 1.5 percent, real output grows by 3.0 percent, and the growth rate of money is 5.0 percent, the change in the velocity of money is

−0.5 percent.