Macro Econ Monetary Policy

All else equal, when the money supply ____ interest rates decrease.

rises

When you believe the Federal Reserve will soon___ bonds, you should sell them as soon as you can.

sell

Reserve Requirment 10%. The federal reserve is concerned about accelerating inflation and wants the money supply to decrease by 20 billion. The FOMC should __ bonds. With a reserve requirement of 105 the money multiplier is ___, if the money supply needs to decrease by $20 billion, the FED must ___in bonds.

sell, 10, 2 billion

The ___ is the difference between the interest rate a bank earns on a loan and the interest rate it pays.

spread

by changing the money ____, the Federal Reserve can influence real gdp.

supply

By manipulating the money _____, the Federal Reserve can change ____ rates, thus encouraging or discouraging additional investment.

supply, interest

The Federal Reserve can influence real GDP by changing the money ____, which will influence gross ___

supply, investments

Which three values are all related, so that when one changes, so do the others?

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

Whether or not a firm chooses to invest in new equipment, machinery, or facilities depend on two things:

the interest rate and the expected interest rate.

In the money market graph

the money supply increases, so M shifts to the right.

The money multiplier equals:

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

The money multiplier equals

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

In the investment demand graph

the quantity of investment demanded increases.

The FED uses open market operations:

to keep the federal funds rate on target

Suppose the reserve requirement in the US is 20%. If there is a $3 billion decrease in reserves, the money supply will change by ____ billion

-15

The federal funds rate is one of the "key" interest rates in the economy because:

-By changing the federal funds rate the Fed can change every other interest rate in an economy. -It represents the interest rate for least-risky loans in the market.

The effectiveness of monetary policy to correct a recession may be limited because of:

-Workers may be worried and save larger percentage of their income. -Businesses may be so pessimistic that they see little in return on their investment.

Suppose the economy is overheating because of a high inflation rate. Indicate the changes that would if the Federal Reserve decides to take action. -This in turn causes aggregate ___ to _____. -As a result, the price level would______ but this could cause unemployment to _____. -The Federal reserve would need to ________ the money______. -This action would _____ interest rates, which______ investment.

-demand, decrease and shift left -fall, increase -decrease, supply -increase, decrease

Suppose initially the federal funds rate is at the announced Fed target. there is a $20 billion increase in demand for reserves. The quantity of reserves demanded ____ the quantity supplied. Banks needing reserves will bid ____ the price of these reserves. The federal funds rate would now be ____ the target rate. to maintain the announced target, the Federal Reserve would need to take action: It would change the quantity of reserves supplied to match changes in demand. only than could int keep the price of these reserves-the federal funds rate- from changing. In this case, the Fed would___the quanitity of federal funds supplied.

-exceeds -up -above -increase

What will cause consumption to fall?

-higher taxes -deteriorating expectations -falling wealth

U.S. Treasury bills are:

-issued for less than one year -payable only at the end of the bill's maturity date.

Confident of future economic conditions, banks lend more funds to their customers, keeping smaller fractions of their deposits as reserves. with more reserves on hand, banks will borrow _____ in the federal funds market. Therefore, the demand for funds in the federal funds market______. and the demand curve for federal funds shifts ______ to maintain the target interest rate of 5%, the Federal Reserve needs to _____ the quantity of reserves supplied by an equivalent amount. To accomplish this, the federal reserve conducts open market operations, ___ bonds.

-more -increases -right -increase -buying

U.S. Treasury bonds and notes are:

-pays interest every six months until the end of the maturity dates. -issued for more than one year -specifies the amount of interest it will pay, frequently called the coupon rate.

Suppose the Federal Reserve has just raised the federal fund rate. Lending in federal funds market may now provide a greater return to the bank, relative to holding bonds in its portfolio. As a result, banks may choose to ___ bonds so they can have ____ reserves to lend. As the ____ bonds ____ the price of the bond _____. This causes the interest rate earned on the bond to _____. Therefore, the change in bond prices push ____ the yield, or interest rate, the bond pays. So, an increase in the federal funds rate will ____ interest rates on other short-term assets.

-sell -more -supply for -increases -falls -rise -up -increase

money multiplier

1/rr times the money multiplier

Suppose the Federal Reserve were to decrease the money supply by $50 billion. The new equilibrium interest rate in the money market is ___%. At this interest rate, there will be $____billion of investment spending. This will cause the aggregate _____ to shift to the ____. The equilibrium output level will____ and the price level will ____.

6%, 40, demand, left, decrease, decrease.

____ demand describes the overall, or total, demand for all goods and services produced in an economy,

Aggregate

Actions taken by a country's central bank to contract the money supply and raise interest rates with the objective of decreasing real GDP and controlling inflation is ______ monetary policy.

Contractionary

___Reserves, the amount the bank can lend out to earn interest, equal ___ reserves minus ___ reserves.

Excess, total, required

We often simply call the Federal Reserve System the ___, whereas the ___ is used as an abbreviation for Federal Bureau of Investigation (FBI) officers or for agents.

FED, FEDs

The Federal Reserve Board can adjust the _____ to influence interest rates and to either encourage or discourage additional economic activity.

Federal Funds Rate.

The interest rate that banks pay one another for borrowing reserves, or federal funds, overnight so they can meet the reserve requirements set by the Federal Reserve is the :

Federal funds rate

Banks can create money by making use of:

Fractional reserve banking

When the Federal Reserve wants to buy or sell U.S. Treasury bonds, the Fed makes these transactions with the:

General public

A decrease in the supply of money will cause the:

Interest rate to rise and the quantity of investment demanded to fall.

Which of the following will cause investment to fall?

Lower expected returns, higher interest rates

With monetary policy

M, I and Y all move in the same direction with expansionary policy.

____ Reserves are equal to deposits times the reserve requirement.

Required

Returning to the original money supply curve, suppose the Federal reserve were to decrease the money supply by $50 billion. This will result in _____ of money because the demand for money ______ the supply of money. The new equilibrium interest rate in the money market is _____%. At this interest rate, there will be _____billion of investment spending in the economy.

Shortage, exceeds, 16 (Where the money demand and money supply curves intersect), 20

Suppose the Federal Reserve were to increase the money supply by $50 billion. This will result in a ______ of money because the demand for money _____ the supply money. The new equilibrium interest rate in the money market is _____% At this interest rate, there will be _______ billion of investment spending in the economy.

Surplus, is less than, 8, 40

Expansionary monetary policy

The action taken by a countrys central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment. Sometimes referred to as "easy money"

contractionary monetary policy

The actions taken by a country's central bank to contract the money supply and raise interest rates with the objective of decreasing real GDP and controlling inflation. Sometimes referred to as "tight money"

Contractionary monetary policy has the opposite effect in all three graphs: All the variables on the x axis decrease. That is:

The money supply decreases, so M shifts to the left. The quantity of investment demanded decreases. Real GDP decreases ( as the result of the decrease in AD)

Organizations safeguards put in place to prevent one government agency from creating money for another government office to spend include:

The requirement that the Federal Reserve buy bonds from the institutions and people that have already bought bonds. The establishment of the Federal Reserve as independent from the Federal government.

Suppose the reserve requirement in the US is 20%Suppose the Federal Reserve wants to increase the money supply by $100 billion. The Federal Reserve should increase reserves by $_____billion.

To increase the money supply by $100 billion, The FED needs to increase reserves by only $20 billion. With a money multiplier of 5, the money supply will ultimately increase by the desired $100 billion (5X20).

Bank panics have occurred several times in the US, although not since the Great Depression.

True

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.

Assume the reserve requirement is 0.4. When the Fed buys bonds and adds reserves to the economy, the effect is _____ in the money supply and banks can make ___loans. If the reserve requirement is 0.4, the money multiplier is _____. Thus if the fed increases reserves by $20 billion, the money supply rises by ___ billion. If we shift the money supply curve to the right by this amount, we find it intersects the money demand curve at a new interest rate of ____%

an increase more 2.5 50 2

Banks can expand reserves, and make more loans by:

attracting deposits and encouraging saving. Borrowing from the federal reserve

The FED carefully monitors a banks reserves. If a bank repeatedly fails to maintain the required level:

banking inspectors may make an unwelcome appearance.

A ___ is a financial instrument that obligates a borrower to repay money, with interest , to a lender

bond

Loans creased from ___ reserves expand the money supply by creating excess reserves in the banking system.

borrowed

When you believe the Federal Reserve will soon ___ bonds, you should buy them as soon as possible.

buy

Suppose the Fed wants to decrease the federal funds rate to 3%. The Fed would need to ___ $___billion in bonds in open market operations. This action will ___ bonds in open market operations. This action will ___ the supply of federal funds.

buy 40 increase increase

When the equilibrium output is below potential output, the Fed should:

buy bonds equals to the needed increase in reserves.

10% Reserve Requirment. The Federal Reserve in concerned that sluggish economic activity. It believes an increase in the money supply of $100 billion will be adequate to allay any fears of recession. The FOMC should ___ bonds. with a reserve requirement of 10% the money multiplier is ___. If the money supply needs to increase by $100 billion, the Fed must _____ in bonds.

buy, 10, $10 billion

change in money supply

change in money supply=1 divided into reserve requirement times change in reserves.

A ___ in aggregate demand will cause the price level to fall and unemployment to rise in the short run.

decrease

To increase gross investment, the interest rate must____.

decrease

If the Fed were to use monetary policy to move the economy toward potential output, it would have to ____ the money supply shifting the Ms to the ____. This would ____ interest rates and ____investment spending. The quantity of investment changes as a result of _______ when this occurs, the aggregate _____ shifts tot he ______.

decrease left increase decrease an increase in interest rates would move investment up along the investment demand line. demand left

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $50 billion increase in aggregate demand. In order to restore the economy to full employment, given a MPC of 0.6, investment would need to:

decrease by 20 billion

The Federal Reserve would need to ______ the money _____

decrease, supply

Historically, during and in the immediate aftermath of recessions, when the economy was still recovering, the Federal Reserve ____ the federal funds rate.

decreased

Since 2009, the average interest rate on savings accounts:

decreased

If an economy is experiencing ___ inflation, an increase in interest rates will reduce consumption and investment and will cool the economy.

demand-pull inflation

____ reserves are equal to total reserves minus required reserves.

excess

When aggregate demand fall too much, to increase aggregate demand we can us ____ monetary policy

expansionary

The market for borrowing and lending reserves between banks is the:

federal funds market

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.

During the 1970s, inflation was:

high and the federal funds rate exceeded 16%

If consumers _______ the amount of spending, aggregate demand shifts to the right.

increase

When the reserve requirement decreases, for a given increase in reserves, the change in the money supply _______

increases

When aggregate demand rises, to avoid _____ and return to the long-run equilibrium, we must decrease aggregate demand.

inflation

The _____ rate is the payment made to agents that lend or save money, expressed as a annualized percentage of the monetary amount lent or saved.

interest

Changing the money supply can affect

interest rates, thereby changing investment spending.

The interest rate:

is the price of money

When the Fed's Open Market Committee decides on a target for the federal funds rate:

it commits to buy and sell bonds through open market operations to maintain the target.

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

With monetary policy changes in the:

money supply, the quantity of investment demanded and real GDP all move in the same direction.

If 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

At high rates, the ______ cost of borrowing funds rises, so banks will be less willing to borrow reserves.

opportunity

The discount rate is the interest rate that banks:

pay when they borrow money directly from the Fed.

The ___ rate is generally equal to the federal funds rate plus 3%.

prime

The ___rate is the lowest commercially available interest rate.

prime

In the AD-AS graph

real GDP increases (as a result of the increase in AD) thus, M, I, and Y all move in the same direction.

To minimize the effects of_____, the Fed needs to increase the money supply.

recession

The federal funds rate is determined by the supply and demand for borrowed ___.

reserves

The federal funds rate is determined by the supply and demand for borrowed _____.

reserves