Homework 6: Money and Monetary Policy

Which of the following will happen when the Federal Reserve lowers the interest rate paid on reserve balances?

Banks will choose to lend into the money market instead of lending to the Fed.

Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds increase by $40 billion, the

M1 money supply will decline and the M2 money supply will remain unchanged.

Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion,

M1 money supply will not change.

Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the

M1 money supply will not change.

The interest rate that the Fed pays nonbank financial firms for overnight loans is called the

ON RRP rate. The ON RRL rate is the rate of interest the Fed pays nonbank financial firms for overnight loans of currency.

Which of the following is a difference between "quantitative easing" and ordinary open-market operations?

Ordinary open-market operations are done to lower short-term interest rates; quantitative easing is used to lower long-term interest rates.

Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. Which of the following would shift the money supply curve from MS1 to MS3?

purchases of U.S. securities by the Fed in the open market.

If the Federal Reserve System buys government securities,

the Fed will pay for them with newly created money. When the Fed buys government securities, they know that the increase in demand generated by its purchases will raise the equilibrium price of those bonds and therefore decrease their equilibrium interest rate. That securities purchase will automatically increase the money supply because the Fed will pay for them with newly created money.

Quantitative tightening refers to

the Fed selling longer-term bonds to increase longer-term interest rates.

In a reverse repo transaction,

the Fed borrows money from nonbank financial firms. The Fed is the borrower and pays the nonbank financial firm the ON RRP rate for any money that they loan to a Federal Reserve Bank overnight using a reverse repo transaction; one of the three administered rates set by the Federal Reserve.

Refer to the table. Money supply M2 for this economy is

$490 M2 is composed of everything in M1 (currency in circulation, checkable deposits, and savings deposits) plus small-denomination time deposits and MMMFs held by individuals: M2 = $490 ($60 + $80 + $50 +$80 + $220). The MMMFs in M2 include only the MMMF accounts held by individuals; those held by businesses and other institutions are excluded.

Refer to the diagrams. The numbers in parenthesis after AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If the MPC for the economy described by the figures is 0.8,

an increase in the money supply from $80 to $100 will shift the aggregate demand curve rightward by $50 billion at each price level.

Which of the following actions by the Fed will most likely increase nonbank financial firms lending?

decreasing the overnight reverse repo rate When the Fed lowers on the ON RRP rate there is less incentive for nonbanks to keep their money at the Fed and more incentive for nonbanks to lend their money into the money market. This will increase the money supply.

The term "bankers' banks" means that the Federal Reserve

performs essentially the same functions for banks and thrifts as those institutions perform for the public.

A checking account balance is money because it

performs the functions of money.

If the Federal Reserve System buys government securities,

the money supply will increase. When the Fed buys government securities, they know that the increase in demand generated by the purchases will raise the equilibrium price of those bonds and therefore decrease their equilibrium interest rate. That securities purchase will automatically increase the money supply because the Fed will pay for those them with newly created money.

Refer to the given table. The value for the dollar in year 3 is

$1.11 The purchasing power of the dollar varies inversely with the price index (expressed as an index number in the hundredths). Use the formula $V = 1 / P : $V = 1 / 0.90 = $1.11.

Refer to the table. Money supply for M1 for this economy is

$235 M1 is composed of currency in circulation, checkable deposits, and savings deposits. M1 = $235 ($65 + $95 + $75). The MMMFs in M2 include only the MMMF accounts held by individuals; those held by businesses and other institutions are excluded.

If the Fed wants to discourage bank lending, it will

increase the interest paid on reserve balances held at Fed.

A $80 price tag on a sweater in a department store window is an example of money funcitoning as a

unit of account.