Macro Econ Exam 3
if the reserve ratio is 15%, and the banks acquires new deposits of $100,000, the maximum it can lend out of these new deposits is
$85,000
using the equation of exchange, if the money supply is $4 trillion, the price level is at 2, and the level of output (real GDP) is $6 trillion, then the velocity of money is _____.
3
if the nominal interest rate on a risk free treasury bond is %6 while the inflation rate is 3%, then this suggests that the real interest rate is:
3%
if the reserve requirement is 1.25%, the potential money multiplier is: a. 0.0125 b. 1.25 c. 80 d. 125
80
M1 includes currency held in bank vaults
False
the equation of exchange is
M x V = P x Y
which of the following statements is correct? a. M2 measures assets used primarily as a medium of exchange b. M2 includes M1 c. M1 includes assets that are primarily used as a means of saving d. the federal reserve discontinued reporting on M1 and M2
M2 includes M1
increased government borrowing to cover a budget deficit causes
a higher interest rate and appreciate of the U.S. dollar
the equilibrium interest rate is determined by
both the supply and demand for money
if U.S. monetary authorities want to strengthen the dollar, they will
buy dollars in the foreign exchange market
if the fraction of U.S. government securities held by foreigners increases,
current consumption by U.S. citizens can rise
historical evidence has shown that from 1960 to 2005 the velocity of M1 money in the united states
has been rising on average
the demand for money
increases as GDP increases
When the Fed increases the money supply, GDP
increases because the resulting decrease in the interests rates leads to an increase in investment
crowding out means that:
increases in the government budget deficit causes interest rates to rise and investment to fall
If the Fed sells government securities to banks, eventually we expect
interest rates to rise
evidence indicates that inflation rates are
lowest in countries where the monetary authority has the most independence
if the price level increases more rapidly than it was expected to increase
output will increase
what is the likely chain of events if asset prices rise?
people feel wealthier, so their spending rises and their savings falls, causing interests rates to rise
the exchange rate is the
price of one nations currency in terms of another nations currency
tightening monetary policy causes interest rates to _____ and aggregate _____ to _____.
rise; demand; decrease
what is the essential factor that enables commercial banks to create money
the availability of excess reserves
if a person borrows $3 at 8% interest and never makes any payments, how much will the loan balance be after 3 years?
$3,779.14
assume that the reserve requirement is 20%. a bank has $20 billion in demand deposits. how much money does the bank have to keep in reserves?
$4 billion
summit deposits $1,500 cash in his checking account. the reserve requirement is 25%. how many dollars' worth of loans can the banking system create
$4,500
suppose the required reserve ratio is 0.2 and the fed buys $100,000 in government securities from big bank. how much money can the commercial banking system create?
$500,000
the current account shows transactions in goods and services; the capital account hows purchases and sales of assets; and the official reserve transaction accounts shows movement of international reserves.
True
when interest rates are high in the U.S., foreigners seek to purchase more U.S. bonds, driving up the value of the dollar in international markets and driving up the prices of U.S. export goods.
True
when the price of bonds increases, general interest rates decrease.
True
if those who favor an active approach to policy think that the natural rate of unemployment is much lower than it actually is and act accordingly, the long run result of their error will be
a higher price level
according to the natural rate hypothesis, the economy tends toward
a natural rate of unemployment in the long run
the graphical representation of the concept that investment might not be sensitive to the interest rate is depicted by:
a vertical investment demand curve
a floating exchange rate
adjust in response to market forces
which of the following are assets a. money b. bonds c. real estate d. all of the above
all of the above
crowding out refers to
an increase in the government deficit causing interest rates to rise and investment to fall
an economist who favors a passive approach to policy (and also favors monetary rules) and observes an increase in economic instability is most likely to think that it was caused by
badly times discretional policy
in the "federal funds" market
banks make short-termed loans to other banks
the federal reserve can purchase _____ to fund fiscal policy, resulting in _____.
bonds; an increase in the money supply
which of the following lists represents monetary policy actions that are consistent with one another?
buy government bonds, lower reserve requirements, raise the discount rate
a banks' assets include all but one of the following. which one is the exception? a. checkable deposits b. loans c. securities d. mortgages e. cash
checkable deposits
the first of those to favor a passive approach to policy were
classical economist
the fed performs all of the following functions except: a. making loans for banks b. clearing checks for banks c. holding deposits for banks d. deciding on appropriate fiscal policy e. holding deposits for the U.S. treasury
deciding on appropriate fiscal policy
the effect of an increase in the money supply, other things equal, is to
decrease the interest rate
assuming full employment in the classical model, if velocity increases and the government wants stable prices, the government should
decrease the money supply
the difference between the federal budget deficit and the national debt is that the
deficit is a flow concept and the debt is a stock concept
which of the following is true about the long run phillips curve
demand-side policy can not shift the curve
the simple money multiplier
equals the reciprocal of the required reserve ratio
the narrowest definition of the money supply includes only currency held by the nonbank public
false
The idea that banks hold only a portion of deposits and lend the rest out is called the:
fractional reserve banking system
money demand refers to:
how much wealth people want to hold in liquid form
if the federal reserve is targeting the interest rate when the demand for money increases, their proper response is to
increase the money supply
if the federal reserve wants to close a contractionary gap, it will
increase the money supply
the balance of payments summarizes the transactions that occur during a given time period between
individuals, firms, and government of one country and individuals, firms, and governments throughout the rest of the world
In the early 1960s, the discovery of the Phillips curve relationship caused economists and policy makers to think that they understood the tradeoffs between
inflation and unemployment
the opportunity cost of holding money is measures by the
interest rate
flat money:
is acceptable as money because the government has decreed it to be so
the equation of exchange
is an identity not a theory
to say that the fed has some independence means that
it can adopt policies without the approval of the congress and the president
jose is putting money for college into a savings account. the bank makes the money available to business borrowers. in essence:
jose is supplying loanable funds for business investments
the national economic objectives that the fed attempts to achieve include all of the following actions except:
keeping tax rates low
the federal budget deficit becomes _____ during recessions because _____.
larger; transfer payments increase and tax revenue declines
the federal reserve may increase the money supply by
lending reserves to banks
the formulation of active policy is
made more difficult if the natural unemployment rate cannot be easily calculated
which of the following is true regarding money and income
money is a stock; income is a flow
in the equation of exchange, the term P x Q is the same as:
nominal GDP
the equation of exchange states that the quantity of money multiplied by the velocity of money equals
nominal gross domestic product
monetarist contend that in the long run, increases in the money supply will
only increases the price level
the federal open market committee is responsible for:
overseeing the buying and selling of government securities in the open market
suppose the reserve requirement ration is 10%. assuming no bak holds excess reserves, a $100,000 open market sale by the fed will eventually
reduce checkable deposits by $1 million
to favor a passive approach to policy is to believe that the private sector is
relatively stable and both wages and prices adjust quickly to eliminate excess supply or excess demand for labor
Money leakages tend to ____ during recessions, causing the actual money multiplier to ____.
rise; fall
if the fed increases the supply of money in the market, then bond prices will ______ and interest rates will ______.
rise; fall
a reduction in the interest rate causes consumption and investment to _____, which shifts the aggregate demand curve _____.
rise; rightward
some economist has predicted that parents will act to offset the impact of deficit spending on their children by
saving more to increase gifts and bequests o their children
the appropriate federal reserve open market operation for reducing the money supply is
selling U.S. government securities
an increase in the expected inflation rate will
shift the short-run Phillips curve upward and to the right
according to the active policy position, eliminating a contractionary gap
should be accomplished by stimulating aggregate demand
discretionary policy advocates believe
that self-correction forces work slowly
If on Tuesday you can buy 125 yen per U.S. dollar and on Wednesday you can buy 120 yen per U.S. dollar,
the U.S. dollar has depreciated and the yen has appreciated
international evidence suggests that
the countries with the most independent central banks are the countries with the lowest inflation rates
suppose that U.S. incomes rise relative to British incomes. Then,
the dollar will depreciate and the pound will appreciate
The liquidity of an asset indicates
the ease with which it can be converted into the medium of exchange without a significant loss of value
monetarist and classical economist agree that:
the economy is self-stabilizing in the long run
when the Lon-run aggregate supply curve is drawn as a vertical line, the theorist is assuming that:
the economy tends to full employment in the long run
cyclical budget deficits refers to
the fact that deficits increase during retractions and decrease through expansions
if the federal reserve decides to increase the money supply:
the federal funds rate will fall
when the short run aggregate supply curve has a steep slope, then for a given increase in aggregate demand
the increase in real GDP will be relatively small and the increase in the price level will be relatively large
the phenomenon that interests rates may be so low that increases in the money supply will have no impact on aggregate demand is called:
the liquidity trap
the discount rate is:
the rate regional federal reserve banks charge depository institutions to borrow reserves
if banks allow some of their excess reserves to remain in the vault
the simple money multiplier will exceed the actual money multiplier
to say the interest rates represent the opportunity cost of holding money means that as interest rates rise:
there is movement upward along the demand curve for money
which of the following is not true of federal reserve notes? a. they are fiat money b. they are a liability of the fed c. they are redeemable for other federal reserve notes d. they are redeemable for gold
they are redeemable for gold
if price level rises, the demand for money curve will shift to they right
true
the long run phillips curve is
vertical
if interests rates fall in country A, other things constant,
demand for that country's currency will fall and the currency will depreciate
U.S. debt relative to GDP, has never exceeded 100% because if it did so, the federal government would be bankrupt.
false
as people come to expect higher inflation, the long run phillips curve shifts leftward
false
when we draw the supply of money as a vertical line it is to suggest that the quantity of money supplied is totally dependent on the rate of interest
false
if the reserve requirement is 25%, then a $1 increase in reserves means that the money supply:
has the potential to increase by $1
if the fed buys bonds, then the money supply:
increases, as the interest rate falls, the quantity of money demanded increases
in the early 1960's, the discovery of the phillips curve relationship caused economist and policy makers to think they understood the tradeoffs between
inflation and unemployment
all of the following are true along a long run phillips curve except
inflation and unemployment are inversely related
those who favor passive approach to policy believe that
las associated with implementing policies are too long and unstable for discretionary policy to be effective
in the long run, when the economy is at full employment any changes in money supply:
leads to a change in prices
any annual surplus in social security tax collections over and above benefit payments must by law be:
lent to the government to help finance current federal spending AND used by U.S. treasury bonds
according to the rational expectations school
people form expectations, in part, by considering the probable future actions of government policy makers
when the fed wants to decrease money supply, it will,
sell bonds
in the balance of payment accounts, a net importer of capital is a nation that
sells more assets to individuals in other countries than the assets is buys from them
which of the following is true of an annually balanced federal budget
such a policy could worsen a contractionary gap
if the economy is at the natural rate of unemployment but those who favor an active approach to policy think the natural rate is lower, they will try to shift
the aggregate demand curve rightward
which of the following would not increase French exports to the United States
the appreciation of the French franc
the velocity of money is defined as
the average number of times each dollar is used to purchase goods and services.
in the U.S. balance of payments, direct investment by Americans in foreign securities is included in which of the following a. official reserves account b. capital account c. current account d. government assets abroad e. merchandise trade balance
the capital account
Along the short-run Phillips curve, when the unemployment rate goes down,
the inflation rate goes up
the demand for money curve describes how the quantity of money demands varies with
the interest rate
the opportunity cost of holding money increases when
the interest rate rises
velocity will be higher
the less effective money is as a store of value
if real output and velocity are stable and predictable, then the equation of exchange can be used to derive a simple relationship between
the money supply and the price level
when the fed buys U.S. government bonds from a member bank, the immediate effect on that member bank's balance sheet is
there is no change in the total amount of assets or liabilities
the wage rate considered acceptable to workers engaged in collective bargaining will be determined in part by what monetary policy workers expect in the new future
true
the natural rate of unemployment hypothesis suggests that the unemployment rate can stay below the natural rate only
with a continuously increasing inflation rate
which of the following is the least liquid? a. money in a savings account b. a picasso painting c. a U.S. treasury bond d. $100 cash
a Picasso painting
If a customer deposits $1,000 cash into her checking account, the bank's
assets and liabilities both rise by $1,000